Foolish Forecast: Mine Safety's Groundhog Day

Three months, a week, and a day after the traditional date, May 10 is the first of four "groundhog days" that safety-equipment manufacturer and Motley Fool Hidden Gems pick Mine Safety (NYSE: MSA  ) will hold this year. The company's report on operations for the first quarter of 2006 is scheduled for release before market open tomorrow.

What analysts say:

• Buy, sell, or waffle? Five analysts follow Mine Safety. Four of them rate the stock a hold, and one a buy.
• Revenues. Analysts expect to see 4% revenue growth tomorrow. $237.7 million is the target.
• Earnings. Profits look to be headed the other way. Wall Street expects a 4% decline to $0.55 per share.

What management says:
Mine Safety values actions more than words. It really hasn't said much of note since its last earnings release, so let's just travel back in time to March 1, and see what was going on then.

Fiscal 2005 was a good year for Mine Safety. The company grew revenues 6% and profits 15%, with growth in both metrics accelerating toward the end of the year. The fourth quarter saw 8% sales growth and 37% income growth, helped by federal funds finally being released to U.S. fire departments wishing to buy Mine Safety's self-contained breathing apparati.

CEO John Ryan added to the above that although U.S. federal funds turbocharged the results, each of the company's geographic divisions helped out with "solid gains in both sales and income." However, Ryan ended on a sour note, warning investors that 2006 will be a "transitional year" because of a strategic decision by the U.S. government to split its orders for advanced combat helmets among several suppliers, only one of which is Mine Safety. The company expects this decision alone to sap $60 million from its annual sales to the U.S. military.

What management does:
That's a crying shame for Mine Safety shareholders. 2005 was going pretty well for the company, with gross margins falling so little that, by cutting its operating costs, the company was actually able to improve its operating and net margins over the course of the year. And now it seems that momentum may get sucked down the sinkhole of a "transitional year."

Margins %	9/04	12/04	3/05	6/05	9/05	12/05
Gross	39.3	39.9	39.8	39.7	39	39.1
Op.	13	13.3	13.7	13.3	13	13.8
Net	8.4	8.3	8.6	8.7	8.4	8.9

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

The Fool says:
With Mine Safety in transition, it will be more important than ever to keep an eye on the company's balance sheet, to ensure it's being managed to deal effectively with the shifting demands for the company's products. There has been more than one occasion in the past where we saw Mine Safety build up inventory at rates faster than sales growth. Over the last six months, in fact, inventories were again up slightly faster than sales (5% vs. 3%.) Tomorrow and throughout this new fiscal year, I'd keep a close watch on both inventories and accounts receivable.

Competitors:

• Honeywell (NYSE: HON  )
• Lakeland (Nasdaq: LAKE  )
• Abatix (Nasdaq: ABIX  )

Customers:

• Home Depot (NYSE: HD  )
• Airgas (NYSE: ARG  )
• WW Grainger (NYSE: GWW  )

Mine Safety is a Motley Fool Hidden Gems pick, and Home Depot is a Motley Fool Inside Value pick. Try out any of our suite of newsletters with a 30-day free trial.

Fool contributor Rich Smith does not own shares of any company named above.