We believe strongly in a team effort here at the Fool, which is why I'm chiming in with my two cents on Motley Fool Hidden Gems pick Mine Safety Appliances (NYSE: MSA) even though my capable colleague Rich Smith has already given a good rundown of the latest earnings report.
In it, Rich noted that inventories had grown at twice the rate of revenues, measured year over year. That, as we have always said here at the Fool, is a red flag worth watching. But as I discussed yesterday, bloated inventory can, paradoxically, sometimes be a sign of revenue strength to come.
If you're too busy to make that click and get the gist of what I explained there, here's the briefest summary: Expansion of some types of inventory -- mainly raw materials -- can be a good sign, indicating that management is ramping up for bigger sales just down the pike.
Alas, that doesn't look to be the case here. In fact, the evidence suggests the opposite.
While total inventories rose in the 24% range, the breakdown makes things look even worse. Finished goods were up 37.8%, and works in process climbed 88%. In contrast, raw materials fell 22.6%. One read on those numbers? The company is having trouble moving what it's got. The half-done stuff is piling up, and it's not expecting a big boost in the near future.
I'll admit right off the bat that I'm no expert in Mine Safety's business, but after perusing the transcript of the latest conference call, I didn't see any satisfactory explanation for the inventory situation, other than a note that it's an area where the firm is hoping to make significant improvement.
We hope so, too. And we also hope that the negative inventory divergence that we've witnessed this quarter, along with the sluggish sales, isn't a sign that the top line is due for further stagnation.
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Seth Jayson
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