Halma Playing Defense With Some Aggression

Human beings are pretty much driven to categorize, so I don't really blame analysts for trying to categorize companies and their business mixes as "late-cycle" or "defensive", but those designations can sometimes hinder as much as they help. Halma (OTCPK:HLMAF) (HLMA.L) is indeed "defensive" by some metrics, but this is a company that is more than happy to go on the offensive - witness the company's roughly 10% trailing compound revenue growth rate, its double-digit FCF growth rate, its double-digit returns on invested capital, and its preference for redirecting cash flow toward continuous M&A as opposed to sending it back to shareholders.

What's also not so defensive about Halma is the valuation. Trading at around 18x my fiscal 2018 EBITDA estimate, Halma's virtues are not ignored by the Street, though I won't tell you that the low-teens FCF growth baked into the valuation is unreasonable or unattainable.

Investors will note that Halma's ADRs have that dreaded "F" at the end. Although the shares are reasonably liquid in terms of average daily trading volume, the liquidity can be very lumpy, and I would suggest that investors interested in Halma consider buying the London-listed shares.

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Halma Playing Defense With Some Aggression

MSA Safety A Solid Niche Business, But Valuation Is Puzzling

I like little niche businesses that have solid underlying growth drivers, relatively limited competition, and aren't widely followed. MSA Safety (NYSE:MSA) broadly qualifies, as it is a strong player in worker safety markets like self-contained breathing apparatuses, gas detection, head protection, and fall protection, and enjoys solid market share in many of these markets despite competing with the likes of 3M (NYSE:MMM) and Honeywell (NYSE:HON).

As far as growth drivers, ongoing product innovation can continue to drive sales growth in developed markets like the U.S., while emerging markets like China and Brazil begin to adopt more stringent standards for worker protection.

The "but" is valuation. I get that niche businesses will often trade at premiums, and I can understand how the market may be incorporating a premium to account for the possibility that a company like 3M would acquire MSA Safety. Even so, I just cannot connect the dots here on valuation enough to get bullish.

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MSA Safety A Solid Niche Business, But Valuation Is Puzzling