Three months ago, Motley Fool Hidden Gems recommendation Mine Safety Appliances
Three months later, we saw the flip side of small-cap volatility peek its ugly head out of the shaft. On Wednesday, Mine Safety announced earnings that fell $0.07 short of estimates. History promptly repeated itself in reverse, as the stock took a 15% shellacking.
Which raises the question: In a world awash in terrorist threats at home and armies deployed abroad, a world in which oil is now selling for -- what is it up to now? $427,875 a barrel? -- making coal-mining a cash crop once again, how is it that a company that specializes in selling safety equipment to miners, hazmat crews, Homeland Security, and the military managed to disappoint Wall Street? Let's find out.
In Q2 2005, Mine Safety reported a 3% increase in sales and a 6% increase in profits versus Q2 2004. "Well there you go," you say. "At just $1.5 billion in market cap, Mine Safety is still a small cap. Wall Street wants small caps to grow into big caps, and if Mine Safety isn't growing much, well, um, there you go."
Except that Mine Safety is growing. One quarter is just that -- one little quarter. All you need to do is back up a of couple steps and take a look at a slightly bigger picture -- say, Mine Safety's performance over the past six months -- to see that the company grew revenues 10% and profits 18% year to date, against H1 2004.
So the answer to investor displeasure with Mine Safety must lie elsewhere. Perhaps in the company's advice that contracts for its gas masks are starting to lapse. Perhaps in worries that component shortages and federal funding delays are putting sales of breathing gear at risk.
But honestly, after reviewing the company's earnings release carefully, I see only a single red flag, and it's none of those mentioned above. The one number in the whole release that worries me is inventories. Those are up 23% from their year-ago level, which is completely out of line with the company's 10% sales growth. After seeing what out-of-control inventory levels have done to the stocks of other gems such as Hooker Furniture
And while you're watching those inventories, while away the hours reading our past columns on Mine Safety:
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