When protective gear manufacturer and Motley FoolHidden Gems recommendation Mine Safety Appliances (NYSE:MSA) reported earnings last week, the subheadline on its press release read, "Commercial Sales Increase 10%."
Mr. Market responded by decreasing Mine Safety's market cap by nearly 10%. It just goes to show that you can use a headline to fool some investors some of the time, but not to fool all of Wall Street all of the time. Speaking of fooling, let's take a Foolish look at what really happened at Mine Safety last week. First, that "commercial sales" bit -- what is that?
This was Mine Safety's too-clever attempt to mask a decline in sales to the military in Q1 2006. If you read that headline to mean "sales increased 10% in comparison with last year," then consider yourself fooled. Total sales only increased, and total revenues actually decreased, a fraction of a percent. Mine Safety undershot analyst estimates of 4% growth as a result of the U.S. government's decision to split its orders for advanced combat helmets among several suppliers, and Mine Safety's completion of certain contracts for providing gas masks.
It was a similar story with profits. You'll no doubt notice that no mention of the firm's profits made it into the headline, and there's a reason for that: Wall Street wanted to see $0.55 per diluted share, but all Mine Safety could muster was $0.42, for a 26% decline year over year. Blame non-cash restructuring costs, stock options expensing, and a higher tax rate for much of the decline.
Overall, Mine Safety appears to be transitioning from a company that can depend on stable and growing sales to the U.S. government to one that will require news like "commercial sales increasing 10%" to keep its sales and profits rising. It's way too early in the transition to know whether Mine Safety can pull this off. But if nothing else, I expect the new product mix will yield an improvement in accounts receivable (A/R). The Feds are notoriously slow payers; private customers will likely pay their bills more promptly. Mine Safety's measy 1% growth in A/R in the quarter just ended would appear to support this view.
In closing, as long as the firm is courting transition, I've got a couple of transitions of my own I'd like to suggest:
- First, quit it with the headline spin, Mine Safety. You didn't fool anyone with your "record sales" pitch, or with your "commercial sales" qualification, either. Why embarrass yourself even trying?
- Second, when you've got honest-to-goodness good news to report, don't hide it away in an SEC filing. For heaven's sake, you increased free cash flow by 24% year over year, generating $16.9 million worth of green stuff this quarter! When you've got good news like that to share, put it in the press release -- and for that matter, give us the whole cash flow statement up front, too.
Interested in outstanding small-cap stocks flying under the market's radar? Join Tom Gardner and other investors like you on the Motley Fool Hidden Gems discussion boards -- available for 30 days with a free trial.
Fool contributor Rich Smith does not own shares of Mine Safety.
