MSA Safety Incorporated

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

MSA Safety is a global leader in the development, manufacture, and supply of safety products, solutions, and services protecting people and facility infrastructure.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

MSA Safety’s moat is a narrow one, primarily rooted in its reputation for quality, reliability, and industry expertise, but it is challenged by intense competition, low growth in its core business, and risks from material supply chains and technological obsolescence.

Business Overview

MSA Safety Incorporated is a global leader in developing, manufacturing, and supplying safety products, solutions, and services. Their main areas include:

  • Core Products: These include respiratory protection equipment, fall protection systems, and other personal protective equipment (PPE) such as helmets, gloves, safety glasses, and gas detection systems. These products cater to a variety of industries, with a primary focus on worker safety.
  • Safety Service: MSA provides a variety of safety services and solutions, including monitoring, safety training, detection services, safety consulting, and other related services. This segment often serves as a recurring revenue source, particularly for long-term customers.
  • Geographic Segments:
  • The Americas: This segment includes sales to the United States, Canada, Mexico, and Latin America. North America is a mature and competitive region.
  • International: This segment includes sales to Europe, the Middle East, Africa, and the Asia-Pacific regions. This segment offers more growth opportunities.
  • Corporate: This segment represents corporate expenses and certain centralized sales and operations that can not be attributed to the other regions.

MSA Safety operates in a diverse and mature industry with steady demand, but also increasing competition and challenges. The markets are generally price sensitive, and a large proportion of revenues rely on regulations and their enforcement.

Competitive Landscape

MSA Safety operates in a highly competitive market with many established players and new entrants. Some of its direct competitors include 3M Company, Honeywell International, Drägerwerk AG, and a multitude of other regional and global players. Here’s a breakdown of the competitive landscape:

  • Pricing and competition: Many companies compete through price, making it difficult to charge a premium without a compelling product advantage. The market is generally fragmented, resulting in several competitors.
  • Innovation: Constant innovation in products and services is needed to maintain a competitive edge. Competitors are continuously improving the quality, efficiency, and effectiveness of their products. The industry also needs to adapt to newer safety standards and environmental and sustainability trends.
  • Regulatory influence: Compliance with safety regulations and certifications is essential for market entry. Government procurement is a significant sales driver. It is important for the company to work closely with agencies to get their products approved for use across multiple jurisdictions.

Moat Analysis: 2 / 5

  • Reputation and brand: MSA enjoys a long history of trust, reliability, and premium brand status. The brand has been associated with safety and performance for many years, which gives the company a competitive advantage.
  • Customer Loyalty: Some customers value MSA’s track record and prefer to stay with a reliable long-term partner, even in the presence of comparable alternatives. Also, some products, like certain detection devices, entail specific training, and this high switching cost creates a degree of stickiness in customer relationships.
  • Innovation: Although MSA continues to innovate, its new products are not necessarily protected by strong, proprietary technology. While new product development is often mentioned in earnings calls, they face a rapidly changing marketplace.
  • Limited Pricing Power: Despite its brand, MSA is not always able to pass on higher costs due to competition. Its pricing flexibility is limited in commoditized product areas. It has to manage pricing pressure from both competitors and customers.
  • Lack of Exclusivity: Many of their products, and especially the core product offerings, are easily replicated by its competitors, which makes it hard to create barriers to new entrants. Despite some patents that the company holds, some aspects of design or manufacturing can be easily imitated.
  • Regulatory Risks: Although governmental requirements related to PPE can be advantageous, changes in regulations that could favor different products also can present a risk, requiring sudden and potentially expensive adjustments to products or manufacturing processes.

Moat Rating: 2 / 5

MSA Safety has a narrow moat, primarily based on its brand, established expertise, and customer loyalty. However, the company faces significant competition, limited pricing power, and risks from disruptions and rapidly changing technologies, putting it at risk of declining performance and rendering it a two-star, narrow-moat business.

Legitimate Risks that could harm the moat and the business:

  • Technological Disruption: New technologies (like virtual reality training, cheaper sensor technologies, etc.) can reduce the usefulness of MSA’s current products. As their current main products rely on old technologies, new innovations from competitors could diminish their sales. It must invest more on research and development to mitigate this risk.
  • Material Supply Chain: As a manufacturing company, MSA is exposed to commodity price increases, supply chain disruptions, tariffs, and geopolitical risks. Labor costs in their main manufacturing hubs, China and Germany, are also rising, creating challenges to maintaining margins.
  • Pricing Pressures & Competition: New and old competitors can drive down prices, especially in industries that are already highly price-competitive. Although customers respect MSA as a known and solid brand, they will only tolerate pricing pressure only to a certain point before changing to a cheaper alternative.
  • Economic Cycles: Economic downturns often reduce capital spending by key customer industries such as utilities and construction, resulting in reduced demand for their products, a slower growth rate, or even declining revenues.
  • Geopolitical Risks: The company is exposed to geopolitical risks given their international presence and multiple supply chains. Changes in trade agreements, political turmoil, or local regulatory requirements can also put financial pressures on the company.
  • Product Liability: It’s a big risk in the safety equipment industry because of the implications of product failures. A product failure could trigger huge lawsuits, reputational issues, and large financial losses. The more lawsuits that are settled against them, the greater that company would be exposed to negative outcomes.

Business Resilience:

  • Core industries are critical: As MSA’s main business comes from providing safety equipment and services, these sectors are resilient in good and bad economic cycles, since governments and companies are required to follow regulations on safety.
  • Brand recognition: They have established a name and reputation as a reliable safety provider. This has built a certain level of trust with customers, and this will be important in times of economic distress.
  • Diversification: They are exposed to a variety of sectors, so a change in a single sector will have a diminished impact on overall results.

Financial Deep-Dive

Here is a deeper look into the latest financials and how they are relevant to the business:

  • Revenue Growth: The company’s revenue increased by 15.4% in 2022 compared to 2021, reaching $1.5 billion, and continued its upward trajectory in 2023 reaching $1.65B. This growth was driven by strong demand in several key segments and regions. However, some of the company’s core segments are experiencing low growth rates, so it has to depend on acquisitions and other strategies to grow.
  • Profitability: Despite revenue increases, profits have been inconsistent, falling from $191M in 2021 to $141M in 2022, and slightly recovering to $170M in the first three quarters of 2023. The changes are a result of the costs incurred because of supply chain issues and high inflation during that time.

The company has a history of steady revenues with margins that can fluctuate wildly depending on various factors, such as costs of products and one time charges.

  • Margins: The company has high gross profit margins-between 43-45%. However, operating margins are usually around 10-13%, which suggests that they have higher operating expenses, which can be reduced for better profitability in the future.
  • Capital Structure: MSA has a healthy balance sheet and the current capital structure comprises a balance of debt and equity. With $460M in net debt, and $2.16 billion of total assets, the company is leveraged to a certain point. The main debt consists of long-term liabilities.
  • Cash Flow: Cash flows from operations were a positive $161.3 million in the 9 months ended September 30, 2023, a substantial increase compared to last year, and are enough to provide resources to fund their investments. However, as a primarily manufacturing company, they are exposed to supply chain disruptions which can increase input prices and reduce cash flows.

Despite good financial management, MSA’s results are affected by volatile macroeconomic conditions, which leads to fluctuations in earnings and revenues. Their high dependence on revenue from the American market makes them vulnerable to specific economic downswings or changes in consumer tastes in the region.

Understandability Rating: 2 / 5

MSA Safety is relatively simple to understand. Its business is not very complex, mostly involving sales of safety equipment and services. However, some nuances, such as their exposure to a wide variety of regulations, their distribution network, and their financial reporting can be difficult to fully grasp, making the business a little complicated to research.

Balance Sheet Health Rating: 4 / 5

MSA has a fairly healthy balance sheet with a comfortable level of debt, solid cash flow generation, and a significant amount of assets to support its operations, making it a solid choice for investors looking at a company with stable finances.

One major concern highlighted in their latest earnings calls was with relation to their supply chain issues and disruptions due to geopolitical factors. The management said that these factors were improving but that they are continuing to closely monitor the situation.