While it looked as though the markets started 2025 with momentum behind them, Tuesday's trading put the brakes on any of that talk, with the S&P 500 losing more than 1% on the day.
On Wednesdays, I write about stocks hitting 52-week highs or lows. According to Stocktwits, yesterday's highs were 56, compared to 54 lows. Translation: This is not a very bullish market.
Stocktwits reports the market’s 52-week highs and lows five days a week, providing a spreadsheet of the stocks in either camp. The site believes stocks hitting 52-week highs with few followers are ready to increase as more investors jump on the bandwagon. Conversely, those hitting 52-week lows with a significant following are likely to keep moving lower.
In yesterday’s trading, MSA Safety (MSA) jumped out at me. It hit its fourth 52-week low of the past 12 months at $159.30. The manufacturer of protective safety gear has just 150 Stocktwits followers, suggesting that it’s unlikely to face an onslaught of negative sentiment in the coming weeks, pushing the stock into the $140s, a level it hasn’t traded at since October 2023.
MSA Safety could be a value play or a value trap. Here are some arguments for both scenarios.
MSA Is a Value Play
Whenever I consider whether a stock is a value play, I like to return to when the business was functioning at an extremely high level. In the case of MSA Safety, that happens to be today.
- Its revenues in the trailing 12 months (TTM) ended Sept. 30, 2024, are $1.80 billion, the highest they’ve ever been, according to S&P Global Market Intelligence.
- The same goes for the TTM EBIT profit of $415.0, a margin of 23.0%.
- Its EBIT margin over the past decade has ranged from a low of 12.0% in 2015 to a high of 23.0% ended Sept. 30. That’s nearly double.
- Its net debt/EBITDA ratio as of Q3 2024 was 0.9x, the lowest in the past decade.
- As of Sept. 30, its return on capital (TTM) was 15.5%, 50 basis points less than at the end of 2023 but the second highest in a decade. Once the fourth quarter is announced in February, it’s likely to be higher than 16%.
I could go on.
The point is that MSA Safety looks better than ever by virtually every financial metric or ratio. Its Altman Z-Score--which indicates the likelihood of bankruptcy proceedings in the next 24 months--is 6.13, an all-time high. For reference, anything over 1.81 is considered out of danger for a near-term bankruptcy.
In May 2024, the company introduced its 2028 financial targets at its annual Investor Day presentation. It expects to deliver $2.2 billion in organic revenue (excluding acquisitions) by the end of 2028 and an adjusted EPS of $10.50.
Based on 2023’s numbers, that’s a CAGR of 4.1% for sales and 8.4% for adjusted EPS. On average, it expects to convert at least 90% of its adjusted earnings to free cash flow. In 2023, it was 143%.
Most importantly, in January 2023, MSA Safety divested its subsidiary holding legacy liabilities for “all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from its balance sheet,” its Jan. 5, 2023, press release stated.
As a result, CFO Lee McChesney stated, “This transaction enhances predictability in the cash flows of our business and reduces our risk profile. Our balance sheet remains strong, and we are confident in our ability to delever within 12 to 18 months while maintaining our current dividend policy.”
It lost $129 million in 2023 as a result of the sale. Onward and upward.
Why Might It Be a Value Trap?
The organic sales growth rate is the only downside to investing in MSA stock. While 4% is reasonable, a recession would reduce that. However, given the 20% decline since mid-July, the stock isn't priced for perfection, so the downside would likely be reasonable even if that were to happen.
Its annual growth rate over the past decade ranged from a low of -3.8% in 2020 to a high of 17.0% in 2023. Any operational misfires would result in lower profits, stretch its valuation, and lead to a lower share price.
That’s the only negative aspect I can think of. However, its products are relatively dull, albeit vital, which explains why it only has 150 Stocktwits followers.
The Bottom Line
The following chart for its 2024 Investor Day presentation says it all.
The more I look at MSA Safety, the more I like it. I want to recommend an options play on the stock, but its volume and open interest are virtually non-existent.
At current share prices, you should be able to double your money by its 2028 targets.
The risk/reward proposition is in your favor.
