Earlier this week, Motley Fool Hidden Gems selection Mine Safety Appliances
On his show Mad Money, Cramer speculated that the federal government will respond to the Sago mine tragedy by boosting funding for mine safety equipment, thereby creating a windfall for companies like Mine Safety. (Keep in mind that the company also makes safety equipment for firefighting, construction, homeland security, and the military.)
More than anything, this bump is a testament to the power of stock-picking gurus. In spectacular superhero fashion, these mortals have the telekinetic ability to will price increases upon thinly traded small-cap stocks. Such bandwagon-driven price spikes, of course, usually last only about as long as it takes for the wagon leader to point the herd in another direction. The price of the stock returns to Earth, and all the while, the value of the business hasn't really changed.
Don't get me wrong: Cramer's investment thesis for Mine Safety may prove correct. It may turn out that the federal government does indeed spend more money on mining safety equipment. In addition, consider a recent report from the Chinese government revealing that 5,986 miners died in 3,341 mining accidents throughout China in 2005. With a marketing presence in that region, Mine Safety should benefit from China's pledge to improve its own mine safety standards.
Lest we deceive ourselves into believing that the years ahead will be nothing but rainbows and roses, remember that Mine Safety faces a very formidable challenge on the near horizon: the decay of North American sales. Mine Safety's disappointing results in its two most recent quarterly reports were due largely to softening North American sales, partly due to delayed disbursement of federal funding to firefighters. Now, with grants to firefighters finally flowing, management believes that a strong fourth quarter could make up for the shortcomings of the previous two quarters. Fulfilling these fourth-quarter expectations will be a strong indicator of management's effectiveness.
But even if Mine Safety impresses with a dynamite fourth quarter, the softening of North American sales will remain a long-term challenge. As military contracts for advanced combat helmets dry up and federal appropriations for homeland security begin to languish, Mine Safety will have to penetrate new markets -- like ballistic body armor and perimeter threat detection systems -- just to keep sales flat. On the flip side, the company has been tightening up North American operations by cutting sales, general, and administrative expenses for the region by 5%. In December, management announced "Project Outlook," a consolidation plan that will cost $5 million in the first quarter of 2006 but will save $4 million annually.
If management can succeed in its efforts to preserve the top line while improving the bottom line, shareholders would be very pleased in the long run. But unlike short-term price fluctuations, it will have nothing to do with the whim of a stock-picker.
Digging for nuggets on Mine Safety? Eureka!
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