MSA Safety: The Original "Picks and Shovels" Company
The picks-and-shovels investing theme is a favorite of mine. The theme takes its name from the California Gold Rush. Prospectors were not guaranteed to find gold but the people selling the picks and shovels certainly earned a better and more stable living. Thus, the suppliers of goods and services that are essential to the creation of another finished product are often fertile grounds for prospective investments. MSA Safety is one company that fits quite well into the picks-and-shovels theme and it has slowly and quietly turned into a 100-bagger over the last 37 years.
Historical Background
Dozens or even hundreds of coal miners often died in tragic accidents throughout the ages. However, as mines increased in size and the number of miners below ground increased as well, the U.S. experienced a string of increasingly terrible coal mine explosions in the 1900s. For example, the Monongah Coal mine was the site of the largest coal mine disaster in U.S. history in 1907 with 362 deaths.
After public outcry over these disasters, the government finally made an enormous stride to enhance the safety of mines and miners: Congress established the U.S. Bureau of Mines inside the Department of the Interior on May 16, 1910.
A common reason for these accidents was the typical mining hat. It was usually made of canvas and leather. It also had a metal frame attached that mounted carbide lamps and oil wick lamps lit by flame—a supremely dangerous feature in a coal mine. Thus, with a flame providing the light to see in the dark, it could and did ignite methane gas or coal dust.
Following the creation of the Bureau of Mines was the formation of Mine Safety Appliances in 1914. Their first project was to create a much safer hat and light source for miners. MSA enlisted the help of Thomas Edison and created the electric hard hat. MSA’s Edison Flameless Electric Miners’ Cap Lamp was the first product to receive the approval of the Bureau of Mines in 1915. Over the next 25 years, MSA’s lamps helped reduce mine explosions by 75%.
Compare the typical soft hat (above) and hard hat (below) of the early 1900s.
Life Saving, Mission Critical Products
Although they never literally sold the picks and shovels to miners, MSA has always focused on the providing the other necessary equipment and tools to protect those working in extremely dangerous environments. The MSA product range of today now includes breathing apparatus products, fixed gas and flame detection instruments, portable gas detection instruments, firefighter helmets and apparel, and fall protection gear.
Exemplary Financials
MSA’s financials are quite good despite them being a manufacturer of physical products. This is because MSA’s products are:
essential to safety;
highly-engineered;
now being bundled with software;
mandated by regulations;
often the #1 product in the specific category; and
a small part of the total costs of the end users.
Combining all this means MSA has pricing power over their end customers.
But this doesn’t necessarily mean MSA is price gouging. Whether its a fire department, a refinery, or an actual mining operation, these customers are happy to purchase the best products as long as they provide real value by reducing the number of accidents or by minimizing the effects of accidents when they do occur.
Regarding MSA’s software, this is a somewhat recent, and very interesting, driver of growth and margins. Here’s what MSA’s Chief Technology Officer said at their 2024 Investor Day:
“Not that long ago, software developers made up only a small percentage of our global R&D team. Today, they account for around 45% of all of our engineers. This is a testament to our effective talent acquisition and how we are able to drive retention through the high levels of mission-driven engagement. This recruitment, retention and engagement of our technical staff is really part of our special sauce, attracting top talent in areas like data science, cloud application software is a critical part of our success and retaining our best and brightest keeps MSA top of mind as a safety-thought leader with our customers, government entities, standard writing committees around the world.
This transition to more of a hardware/software solutions provider comes with a lot of business benefits as well. Software does not add to manufacturing costs. It can be continuously updated to provide more value and feature options via over-the-air updates, and we're becoming more embedded in our customers' day-to-day operations with data and analytics.”
—Gregory Martin, MSA’s Chief Product and Technology Officer, 2024 MSA Investor Day
MSA’s products have always detected and alerted users to dangerous situations, but now they are even more powerful with the combination of wireless connectivity and software. A plant manager can see the physical location of MSA’s products and the data they are collecting in real time. If there are abnormal readings at a certain plant location, workers can be directed to avoid the area and a maintenance decision can be made more quickly and precisely.
Leading Market Positions and Value-Creating M&A
Another factor contributing to MSA’s financial success is their excellent track record of value-creating acquisitions. Although not quite a serial acquirer like Constellation Software, from 2010 through 2024 MSA has acquired 7 companies for a total consideration of $1.1 billion. Compare this to its current enterprise value of $6.9 billion.
MSA’s acquisition program has succeeded because the company has stayed inside its circle of competence. For example, it’s two most recent acquisitions were back in 2021. One was Bacharach for $329 million, a leader in gas detection technologies in the HVAC market. The other was BTQ Limited for $63 million. BTQ is a leader in protective apparel to the fire, rescue services, and utility sectors in the UK. Both acquisitions are within MSA’s wheelhouse of mission critical products that help protect the lives of people working in dangerous environments.
Takeaway
Although MSA does sell to cyclical and capital intensive industries that I typically dislike—refining, mining, oil and gas, for example—it would be wrong to totally dismiss MSA as a potential investment. It has many attractive qualities that I look for. It’s products are highly engineered, have leading positions in regulated markets, and are non-discretionary purchases that protect the lives of people. Whether it’s miners, firefighters, or chemical plant employees, none of them can do their jobs without products from MSA. This all adds up to a company whose shareholders have enjoyed a 100-fold return since 1988.
Further Reading
Please Share and Subscribe
If you enjoyed this content, please share and subscribe. Leave a comment as well if you have the time!
Disclaimers for this Substack
The content of this publication is for entertainment and educational purposes only and should not be considered a recommendation to buy or sell any particular security. The opinions expressed herein are those of Douglas Ott in his personal capacity and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing.
Investment strategies managed by Andvari Associates LLC, Doug’s employer, may have a position in the securities or assets discussed in any of its writings. Doug himself may have a position in the securities or assets discussed in any of his writings. Securities mentioned may not be representative of Andvari’s or Doug’s current or future investments. Andvari or Doug may re-evaluate their holdings in any mentioned securities and may buy, sell or cover certain positions without notice.
Data sources for all charts come from SEC filings, Koyfin, and other publicly available information.
Smart management team and great execution
I love these types of companies.