Shares of Mine Safety (NYSE:MSA) have been on a tear this week, rising 17% on Wednesday before giving some back with the rest of the market yesterday and today. While we're certainly glad see good news for shareholders in our former Motley Fool Hidden Gems recommendation (sold last year after a striking three-year, 140% rise in price), I must admit I'm bemused about the apparent motivation for investors' friskiness.

Mine Safety did report second-quarter earnings on Tuesday, but I wouldn't consider them outstanding. Sales came in at $249.1 million, a 14% improvement over last year's Q2, thanks largely to the firm's successful entry into the body armor market. Despite strong competition from firms like Ceradyne (NASDAQ:CRDN) and Armor Holdings, Mine Safety's armor sales totaled $7.3 million for the quarter. Unfortunately, these additional sales carry lower margins than Mine Safety's commercial products do. As a result:

  • Gross margins declined 230 basis points to 37.6%.
  • Operating margins dropped 100 b.p. to 10.6%.
  • The net took a 50-b.p. hit, falling to 6.5%. Put it all together, and Mine Safety's net earnings improved only 8%.

Nor did we find any better news in the firm's balance sheet or cash flow statement. To the contrary, the news there was far worse. Mine Safety's operating cash flow declined, even as its capital expenditures soared. Result: Free cash flow in H1 2007 dropped more than 70% year over year, to just $4 million -- a fraction of Mine Safety's reported net earnings.

Combined with the $26.4 million in free cash flow that Mine Safety generated in H2 2006, this brings the firm up to $30.4 million in FCF generated over the last 12 months. Such weak cash profitability puts the lie to Mine Safety's 33 trailing P/E. Measured in relation to the company's cash profits, as opposed to the accounting profits tracked by GAAP, the company currently trades at a price-to-free cash flow multiple of 67. In this Fool's view, that's entirely unreasonable when weighed against the 7.5% long-term growth in profits that analysts project for the firm.

Honestly, the more I look at the numbers, the less I understand what sparked this explosion in stock price at Mine Safety. The stock looks clearly overpriced, trading at a significant premium to the prices that some of its smaller rivals command. Given the recent spike, and the fact that the fundamentals don't support such a pop right now, I suggest you stay away from Mine Safety for the time being.

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

Mine Safety has already grown its way out of the ranks of Motley Fool Hidden Gems recommendations. Who's still got room to grow? Take a free 30-day trial and find out.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is above ground and aboveboard.