An Opportunistic Play With a Potential 30% Upside

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In the 10 Stock Picks for 2013, Jim Cramer was quite bullish on Mine Safety Appliances (NYSE: MSA), a supplier of safety products in the fire service, homeland security, and oil/gas industries. He thought that the company was a potential target for big companies that were interested in the safety equipment industry. Jim Cramer believed that Mine Safety could easily be acquired at around $60 per share, a 20% upside from its current trading price of $49.70 per share. Could Mine Safety be worth $60? Let’s see. 

Business Snapshot

Mine Safety, founded in 1914, is a global maker of safety products in different industries including oil/gas, fire service, construction, mining, and manufacturing. The company has three main geographical segments: North America, Europe, and International. The majority of its revenue, $561.1 million, or 48% of the total revenue, was generated from the North America region. The second biggest revenue source was the International segment with $325.3 million in sales, while Europe contributed nearly $287 million in revenue in 2011. Its customers were divided into three main categories: industrial and military end-users, distributors, and retail consumers. In the US, US military customers accounted for around 5% of its total sales. In the operation, Mine Safety employed a reasonable amount of leverage. As of September 2012, it had $484 million in total stockholders’ equity, $74 million in cash, and $305 million in debt. However, it recorded a quite huge amount of goodwill of $257 million in the balance sheet. This amount of goodwill might be quite vulnerable to impairment charges that could negatively affect the company’s earnings in the near future.  

Two Previous Buyouts

Jim Cramer mentioned that DuPont and Honeywell (NYSE: HON) could be Mine Safety’s potential acquirers. He said: “Both Honeywell and DuPont want to add to their safety offerings, and they can both afford to pay up, although I see Honeywell as the more likely suitor. Plus, with a market cap of just $1.5 billion, Mine Safety is small enough to be easily digested by either of these giants.” In 2010, Honeywell purchased Mine Safety’s competitor, Sperian Protection, for around $1.4 billion. With well-recognized brands with a strong global distribution channel, the acquisition has strengthened Honeywell’s position in the high growth Personal Protective Equipment industry (PPE). At that time, the deal has valued Sperian Protection at around 13.5x EBITDA 2009. Recently, 3M (NYSE: MMM) has also paid $860 million to acquire Ceradyne, a worldwide leading manufacturer of advanced technical ceramic products for defense, industrial and other commercial applications. Many people thought that 3M had overpaid Ceradyne as an $860 million offer valued Ceradyne at 30x next year’s earnings. However, in terms of EV multiples, the deal didn’t seem to be expensive anymore with around 6x EV/EBITDA.

Peer Comparison

At the current trading price of $49.70 per share, Mine Safety is worth $1.84 billion on the market. The market is valuing Mine Safety at around 11.74x EV/EBITDA. Honeywell, a much bigger company, has the market cap of $55.2 billion. Honeywell is valued at around 11.3x EV/EBITDA. 3M is worth $71.23 billion with the trading price of $103.23 per share. 3M is valued at 9.36x EV/EBITDA, a much cheaper valuation than that of Honeywell and Mine Safety. Among the three, 3M had the highest operating margin at 21.7% while the operating margin of Honeywell and Mine Safety were 11% and 12%, respectively. 

Foolish Bottom Line

If Mine Safety were acquired at the similar valuation to the Sperian Protection deal, the company would be worth around $2.3 billion, a 30% premium compared to its current enterprise value of $2 billion. Thus, Mine Safety could be considered an opportunistic play for long-term investors at its current price.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends 3M and Mine Safety Appliances. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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