If you're like me, you've recently struggled with the following riddle: Why is Mine Safety Appliances (NYSE:MSA) interested in ballistic body armor? Has there been a recent rise in mine-by shootings? While this possibility is intriguing, the answer is actually much simpler: Opportunities exist for organic growth.
With North American sales exhibiting slowed growth, Mine Safety, a Motley Fool Hidden Gems selection focused on engineering and marketing safety equipment, is searching for new ways to grow its North American business. A key part of the company's growth strategy became apparent last week, when it announced plans to launch a new line of ballistic vests for law enforcement. It will be competing in a body-armor market that boasts $140 million in annual sales.
The announcement probably didn't surprise those who follow the business carefully. Mine Safety's most recent quarterly report revealed that it spent 18% more on R&D than in the same period last year, while sales grew only nominally. Sometimes, such R&D spending can indicate that new products are in the pipeline. This sort of organic growth should please shareholders, especially from a company that religiously spends only 2.5%-3% of sales on R&D.
Make no mistake: The body armor market is not for the timid. Large-scale vest replacement programs, bankruptcies, and lawsuits have all recently plagued this sector.
Why, then, would Mine Safety throw its hat in the ring?
The company thinks it has a unique opportunity to position itself in an ailing sector. Armed with proprietary material technology from DuPont (NYSE:DD) and Honeywell (NYSE:HON), Mine Safety has designed three ballistic vests that aim to improve both protection and comfort for the wearer. They already have facilities to design and test ballistic materials, and they offer a line of ballistic combat helmets. Furthermore, they have an extensive sales force focused on marketing to law enforcement.
Perhaps most importantly, Mine Safety boasts a nine-decade reputation for creating products that reduce risks from occupational hazards. This new product offering seems like a natural progression of Mine Safety's business.
Despite the vacuum in the body armor market, don't expect Mine Safety to waltz in and cherry-pick all $140 million on the table. Serious competition exists from companies such as Armor Holdings (NYSE:AH) and DHB Industries (AMEX:DHB). But if Mine Safety can establish a strong market presence with law enforcement, look for it to compete for military contracts as well. Personally, I'd like to see the members of our armed forces wearing body armor that matches their combat helmets.
For a company that boasts more than $850 million in annual sales, entering the $140 million body armor market can fuel only modest sales growth. But this organic expansion is only part of Mine Safety's growth strategy; it's also growing by acquisition. Earlier this month, it swallowed tiny Microsensor Systems, which builds equipment for detecting chemical warfare agents. Just like ballistic body armor, chemical detection is another small but growing market that can provide modest growth to its top line.
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Fool contributor Jason MacGurn can't afford ballistic body armor right now, but he does own shares of Mine Safety. Email him at [email protected]. The Fool has a disclosure policy.
