When seeking out "Hidden Gems," Tom Gardner, co-analyst for The Motley Fool's newsletter of the same name, couldn't have found a more natural fit than utterly un-sexy safety-equipment manufacturer Mine Safety Appliances (NYSE:MSA). It's also perfectly natural that we'd bring our readers up to speed on the company in plenty of time for Tuesday's Q4 and full-year 2006 earnings report -- even though the firm is no longer part of the Hidden Gems portfolio. You'll have the whole weekend to ponder the following:

What analysts say:

  • Buy, sell, or waffle? Four analysts still follow Mine Safety. Three of them still rate it a hold, but one has been won over to the "buy" camp.
  • Revenues. On average, the analysts expect quarterly sales to slide 7% to $224.3 million.
  • Earnings. Profits are predicted to fall down a hole: down 22% to $0.51 per share.

What management says:
Management had precious little good news to relate in last quarter's earnings release. Sales were up in Europe, Latin America, and South Africa, but down pretty much everywhere else. The worst news, as usual, was in the U.S., where the company may be regretting ever taking on the U.S. government as a client. It's lost "on the order of $60 million ... in our sales of military products to the U.S. Government," and continues to await release of "Federal Government funding for the U.S. Fire Service" that is needed so that state governments can purchase more of Mine Safety's firefighting equipment.

Although CEO John Ryan says he is "pleased by our efforts to grow commercial sales in areas outside the U.S. fire service," I suspect that's more an admirable display of the stalwart optimism than any real expression of pleasure.

What management does:
Even as sales flag, you have to admire how Mine Safety has preserved its margins. The decline in sales can't be doing any favors for the efficiency of the firm's fixed assets, yet the gross margins remain untouched. Meanwhile, operating and net margins, while clearly on a downtrend, aren't looking nearly as bad as one might expect.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

39.5%

38.7%

39.1%

39.2%

39.5%

39.4%

Operating

13.6%

13.4%

13.8%

14.0%

13.8%

12.9%

Net

8.6%

8.4%

9.0%

8.4%

8.1%

7.7%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fool co-founder and Motley Fool Hidden Gems co-lead-analyst Tom Gardner finally threw in the towel on Mine Safety back in November, advising Gems members to take their 125% profit (three times what the S&P 500 had produced, by the way), and sell the shares for the time being. Conceding that his expectations of 15% growth for the stock no longer seem realistic in the face of the firm's sales problems, Tom thinks there are better places for our members' funds.

Nothing against the company, mind you, and if Mr. Market decides to discount it to some ridiculous price in the future, I wouldn't be surprised if it re-enters the portfolio. But for now, Tom suggests that investors climb out of the mineshaft and move on to more fertile fields. As I wrote last quarter, I'm inclined to agree.

Still, for those who decide to stick with the company through its current down-cycle, I wish you luck, and I hope that the company proves me overly pessimistic next week.

Competitors:

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

Customers:

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

What did we expect out of Mine Safety last quarter, and what did it produce? Find out in:

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