Pershing Square Challenge 2026 finalists on MSA Safety: a hidden quality compounder? $MSA

Team MSA, how’s it going?

Doing well. Thanks. Great.

Awesome. Well, look, I’m going to let you guys introduce yourselves in a second. Team MSA, you were one of the 5 finalists in the Pershing Square Challenge. I’ve said this on the previous episodes, but all the judges told me this was the best set of presentations they’ve ever seen. So, congrats on being a finalist.

We’ll dive into MSA, the business, how you picked it, and everything in a second, but I’d love it if maybe each of you could give me 30 seconds on who you are, your background, and all that sort of stuff, just so people can get to know you.

Maybe EJ, maybe you can start, just because you’re in the top left of my screen.

Sure, yeah, sounds good. I’m EJ. I’m from Austria and Italy. I moved to the States for college, studied math and physics, and somehow ended up in economic consulting, basically valuing patents that are being litigated.

I love the valuation nature of the work, so I ended up at Columbia Business School. I want to get into finance, whether that’s investing or investment banking—I’m still working that out—but I’ll be joining Evercore this summer. I’m very excited to have been part of this competition. All 3 of us had a phenomenal time.

You said patent litigation, and you hit the magic words, because patent litigation is very, very common—not common, but among value and event-driven investors on the smaller side, patent litigation comes up a lot more than you think. I think there are some Liquidity fans who might be using your services in the near future.

Craig, you can go next.

Yeah, thank you so much for having us on. Prior to business school, I worked at a large-cap value investment manager called Focus Investors, based in L.A. During business school, I’m back as an intern this summer, and then I’m hoping to stay in investment management going forward.

Thank you so much for having us. Again, it was so much fun working on the stock pitch with EJ and Bob.

Awesome. And Bob?

Yeah, of course. My name is Bob McGrane. Before Columbia, I was in corporate strategy, with a little bit of time in investor relations as well, in the financial services industry.

I came back to business school to get my MBA and look to pivot into the investment space, the investment management industry. I’m spending the summer at East Coast Asset Management, which is long-only, and I’m having a lot of fun. I had a lot of fun with this project and I’m excited to talk about it.

You know, if we were writing movies—made-for-TV movies—I have to say, I think Focus Investors and East Coast Asset Management sound like the names of the made-for-TV movie villain stock. I’m sure they’re great guys, but they just strike me as very generic terms.

Let’s go into MSA Safety. This is the company you guys pitched. I’d love to get into the stock and everything in a second, but I think it’s really interesting that this was a class designed for a stock competition. Part of winning, competing, and doing well in a stock competition is selection. There might be a great stock that doesn’t have a great story, and it might lose to an okay stock with a great story.

How did you come upon MSA? How did you guys decide to do this? What would you guys pass on? What attracted you to the story enough to spend a semester researching it and building it into a stock pitch?

Yeah, I can start, and then maybe EJ and Craig can add anything I miss. In terms of our process for selecting the name, we each individually took a pass at putting together a small list of names over the course of about a week.

I originally found MSA on a screener. I was screening for a few things: a certain level of ROIC, ROIC growth, some level of revenue growth, healthy margins, and things like that. I was also screening for a company under a certain market cap, because one of the things we wanted to do was not pitch a name that everybody already knew and had strong opinions about.

We wanted to come into a story and learn about a business, including ourselves, and approach it from an unbiased perspective. So, we each came up with some names, and then over the course of about 1–2 weeks, we debated a few names and looked into each other’s names.

What I personally ended up gravitating toward with MSA was that it’s a very easy-to-understand business model and easy to describe in a competition setting. We saw that they had some differentiated products and advantages, and that was easy for us to analyze and really articulate why it could be a compelling story.

EJ and Craig, I don’t know if I’ve missed anything there.

Yeah, I just think it was funny. The 3 of us applied different screeners, I believe. A couple of names came up in all of our screeners, or in any permutation of 2 of our screeners.

But after what Bob said, looking into this, we started by just reading the 10-Ks, and we realized that there was so much discrepancy between what the real story behind this company is and what is superficially glanceable based on their disclosure.

We immediately saw that there was much more of a story here when it comes to the fact that their portable gas detection is switching toward a subscription model, and the fact that there are these very tricky-to-model replacement cycles for SCBAs. We thought, “Okay, interesting.”

We went to look at the consensus. It looked like it could be interesting, but then we realized that there were only 8 people covering it. To Bob’s point, this is not a household name. We really feel like, at worst, we would be one of the top 11 people to understand this company from the outside, and ideally a little better.

I think that was one of the things that drew us in. We saw an angle there where there was more to it than the disclosure and certainly something that the market might not be appreciating, as opposed to the Googles of the world, for example.

Yeah, look, from a tactics perspective, I think it’s really clever because you guys found a company that is underfollowed, but at the same time, the business model is pretty simple. You come to the judges with a super-complex industrial company, and one of the things they spend the whole time thinking about is, “How does this business work?” For you guys, you say, “Hey, they sell safety equipment.” People can wrap their heads around it really quickly, but they don’t have a lot of preconceived notions.

I thought, from a tactics perspective, that was great. These types of under-the-radar stocks that are in really good businesses tend to pitch well in these contests, just because they’re the type of stocks everyone can see themselves owning. It’s just, “Hey, is it quite cheap enough?” So, no, I think that was great.

Why don’t we just dive in from there? You guys chose MSA, and you’ll spend a semester researching it. What is MSA, and why, aside from the stock competition, are they interesting as a business and as a stock? What is MSA?

I think, for one, I’ll leave it to Craig and Bob because maybe I’m the one with the more colorful expressions here. But I believe one of the phrases we used during the pitch itself was, “This is the OG pick-and-shovel company—the OG quality pick-and-shovel company—that boasts over a century of experience manufacturing and focusing purely on worker-safety equipment.”

Just from the base overview, they have a 2/3–1/3 U.S. and international revenue split, and they operate across 3 segments. Those are detection, so think fixed and portable gas detectors; fire service, so think of the protective gear that firefighters wear, including SCBAs—the gas masks and gas tanks they use when they go into burning buildings; and fall protection. Detection is the fastest-growing segment, and between detection and fire service, we’ve got 70% of the product mix. Craig, Bob, anything you want to add there?

Yeah, I guess just to double-click a little bit on the segments that we found most interesting. As EJ mentioned, detection and fire service were the 2 segments that formed the backbone of our thesis points. I can talk a little bit about detection, and then Craig, if you want to cover fire service.

For detection, that’s split, as EJ mentioned, into fixed and portable detection. Fixed is currently the larger part of the business. That’s where you put a gas detector in a data center or some kind of industrial factory. It detects the presence of hazardous gas and lets you know if there’s an issue in your refinery or whatever it is.

Portable devices are worn by industrial workers. They look like a walkie-talkie—a little device that the worker wears if they’re going into a mine or some kind of enclosed environment. It can say, “Hey, there’s a hazardous gas here. You should evacuate.” They’re increasingly layering this recurring, subscription-based software model on top of those portable devices.

That’s where we spent the bulk of our time looking at the detection business, because we see a lot of opportunity for share gains there. We think their product in that vertical is differentiated, and they’re going to improve their unit economics as they layer that kind of connectivity on top of the hardware. We can talk about that more, but that’s just a brief overview.

Yeah, no, look, that was the thing that jumped out. This is slide 5 I’m looking at in your deck. It was the thing that, when I saw it, I thought, “Oh, that’s so great.” I’d be happy to tell it, but you guys did the work.

As you said, historically, a miner goes in, they have this detector, there’s carbon monoxide or whatever it is in the air, and it beep-beep-beeps. That is a product that would get sold. Why don’t you tell us how it’s shifting, how the new products work, and why that’s a subscription business?

Yeah, so the way we described this in the pitch was that historically, MSA likes to say that they put the canary in the coal mine out of business. Their product replaced the canary in the coal mine. But now, the way we described it in the pitch was that the canary can sing to a wider audience.

Previously, the device just alerted the worker wearing it to the presence of a gas, and that was it. Now it doesn’t just do that. It still does that, but it also alerts nearby workers, saying, “Hey, this guy over there detected some hazardous gas. You should either check on him or leave the area yourself as well,” and it alerts a centralized supervision software system.

That enables a few different things. One is safer outcomes, because people can come to the workers’ aid more quickly. You can shut down certain parts of your factory but not others, because you have a more intelligent data-tracking system. You can also automate certain functions on the back end.

After an incident, there are normally a lot of manual processes to understand what happened, report it, and put it into whatever tracking system you have. Now, a lot of that is automated, so there is an economic ROI as well. But the main thing is that it’s genuinely making these working environments safer.

From MSA’s perspective, they can now charge a subscription for this connected service, which is a more attractive business model for them because it’s steadier revenue, more revenue over the lifespan of a typical device, and higher margins.

No, look, I’m trying to think of a specific example, and I’m struggling to think of one. But you’re going from something that is very commoditized: “Hey, we’ve got something that’s just going to detect carbon monoxide in the air and go beep-beep.” That’s pretty commoditized.

Once you start talking about something that connects to all the other workers, pulls in the data, and makes the data analyzable by the company’s staff, you start to have scale benefits and all this other stuff. Recurring revenue—you can just see how that’s not going to be commoditized. It takes you into a much more profitable, better place.

I think it’s a really fascinating example. Anything else, whether it’s about replacing the canary in the coal mine or anything else about the MSA business, that you guys want to highlight here?

I think one thing to add to Bob’s comments is that, historically, even though a lot of these gas detectors have similar functionality, I wouldn’t say they’re necessarily commoditized. I think MSA’s strength has been the quality of its products, its warranty, and its commitment to the market. By demonstrating the strength of its products, customers continue to come back and buy from MSA.

One of the biggest obstacles to adopting the connected variant is that MSA’s current nonconnected devices work so well. We see MSA Plus and the connected variants as building upon the advantage that they already have in many of these portable gas detectors.

Yeah, and I’m just looking at slide 7. I mean, it’s a long runway. As you said, the unconnected devices—I think they’ve got half a million sold as of today, about 450,000 of their unconnected devices. There are a lot of them out there, and there are a lot of them to get replaced by these connected devices.

I’m looking at slide 6, and it shows the competitive landscape. I haven’t really looked at a lot of these safety and detection markets, so I was a little surprised by their revelation of this kind of share analysis. Maybe you guys could talk about the market share. That would be helpful for people thinking about the competitors, the share, and all that type of stuff.

Yeah, of course. MSA is towards the top of the market-share rankings at the moment. We expect that to improve throughout the projection period for our analysis, based on what Craig said and what I said about how we think MSA Plus, which is what they’re calling that connectivity layer, is differentiated.

They are 1 of only 3 scale competitors that have that connectivity layer right now. We think that’s going to be differentiating as more and more customers want that layer of connectivity. We see their ability to improve their market share through that.

That’s in addition to what Craig said, which I think is important. I’m glad he called it out, because I don’t want it to get lost that it’s not just the connectivity layer that forms their competitive advantage; it’s also the hardware itself. If you look at some of the competitors, Blackline Safety is pretty interesting because they were kind of the first mover in terms of the connectivity layer.

Historically, all these companies have made those portable devices. Blackline was the first to say that this layer of software built into these devices could be really additive. So, they have been a pure-play connected-detection provider. They lack what MSA can provide on the hardware side.

We have heard, just from talking to folks in the field, that if you drop a Blackline device, it's probably breaking. MSA devices are much more durable. MSA also has a pretty interesting advantage: they are the only ones in the entire industry that manufacture their own sensors for these devices.

They are able to innovate the technological capabilities of these devices at a higher rate because they own the whole technology stack from a hardware perspective. Their competitors do not, so not only does that hurt their margins relative to MSA, but they're also behind in terms of innovating the hardware. That's why we think MSA is the leader in the space right now, and that will only compound moving forward.

And just to add on to Bob's observations about Blackline Safety, I think another reason why it's a pretty interesting example is that it recently got taken private. I think the question is, what does this mean with respect to the broader thesis?

EJ, I think we lost you. Damn, it sounded like you were about to make a strong point, too.

He's back.

Better?

Yeah, you're good.

Okay.

Sorry about that. I was just going to say that in investing and economics, you rarely have the conditions to have a purely controlled experiment, and here I would say we have one. Blackline being a pure-play connected-detection model and being taken private means that there is at least 1 large private equity firm that sees the economic value of the connected system.

Not only that, but it sees the system returning value to shareholders within the 5- to 7-year period that private equity companies typically have to do so. So, we thought that was interesting. Also, comparing the installed base that MSA has versus what Blackline lacks, this means that possibly it would translate to pricing power.

Blackline would have to return value through pricing, and that can only serve to benefit MSA. I just think it's funny how, not only in detection—I'll leave it to Craig to talk about this—there's a series of halo effects that MSA benefits from.

People are willing to try out the connected angle with MSA because of the years and decades, and arguably a century, of reputation, hard work, and quality that MSA has for its hardware. The same thing goes in the fire service segment, where there's a similar halo effect, which Craig is much more informed about than I am.

Actually, Craig, that's great. I do want to move on because I've got multiple questions. I think we've talked about detection enough. If it works for you, why don't we quickly hit the other side of the business, the fire service side?

Yeah, so in fire service, MSA has the leading SCBA, the G1, which underwent a ground-up rebuild in 2014. This is really important because, instead, their conglomerate-owned peers just made small patches and fixes to the existing architectures.

SCBAs are legally mandated to be replaced every 10 to 15 years, and that creates an opportunity for share switches. Typically, fire departments are very reluctant to switch brands without replacing the entire fleet. We believe that in the upcoming replacement cycle, MSA will continue to be best positioned to benefit from fire departments evaluating SCBAs and deciding to go with what is the best product: the G1.

That gives us an opportunity because consensus in the market doesn't fully appreciate that the cycle is upcoming. When you look at the way the company discusses this, they've continued to become more open about the cycle. At the same time, they are conservative and say, “This might create some upside,” or, “This could be a potential benefit.”

This is the same way that they talked about the cycle between 2014 and 2018, where they saw the same benefit going forward. MSA is going to be able to continue to capitalize on this. At the same time, they're also taking the MSA Plus technology in their product development into SCBAs with FireGrid, which is their connected variant for the SCBA, implemented by the London Fire Brigade and now with the Los Angeles Consortium of Fire Departments.

This creates another upside that we didn't model into our base-case scenarios: MSA capitalizing on that software advantage.

Great. All right, so I think we've got a good overview of the 2 sides of the business. I want to quickly talk valuation, and then I've got some questions I want to tack on there. Why don't we talk valuation just to set the frame for this?

Yeah, so I'm happy to talk about the way that we got to our base-case IRR, which is assuming roughly a 7% revenue growth rate as a combination of detection outperformance and fire service.

At the same time, it's really difficult to compare MSA to peers or any sort of comp set because our competitors are different and are often conglomerate-owned. However, the company is trading at a historical discount to its next-12-month P/E.

As the company and the business improve toward the hardware-plus-subscription model, we believe they should continue to earn a higher multiple. So, our 22-times projected multiple in our base case is roughly consistent with what they are trading at on average, but we believe the market will continue to reward the company for becoming a better business as we look out over the long term, over the next 5 and 10 years.

Okay, so if I'm just looking at this—I mean, this is the base case you guys presented in your deck and everything—it's kind of 2030, you guys have the stock trading for $350 per share. The stock moves around a little bit, but not that much. As we're talking, it's trading for $160 per share in mid-June 2026.

So, you're talking about more than a double over the next, let's call it, 4 years as kind of the base case.

Cool.

Yes, and I think another component to add is that when you look at a reverse DCF, the expectations for the company at its current stock price are pretty low. That's assuming 3% revenue growth and no margin expansion, which, as the connected-worker revolution continues to occur, should at least benefit margins, if not continue to grow revenues at a much faster rate.

That also doesn't give the company credit for its historical outperformance.

Cool. So, let me ask this. I look at this company and I'm like, these are good, interesting niche businesses that MSA is probably the best in and probably has a little competitive advantage in. But then I come and look at the stock and I'm like, well, I think they're going to earn about $8 per share this year, right? And the stock's at $160.

You guys have them growing 7%. I saw the CFO was at a conference 2 days ago when I was reading the conference transcript to prepare, and he's like, “Hey, we've historically been a mid-single-digit grower. We're going to be a mid-single-digit grower again. We might do low single digits in the front half of this year, but we'll be mid-single digits.”

Our profits will grow a little bit quicker because historically 30% to 40% of our growth comes to the bottom line. So, I hear all that and I'm like, yeah, this is good in a compounder sense, but I guess the thing that's lacking for me is that it doesn't scream alpha, right?

I'm not getting hit over the head with, “Hey, here's the thing the market is just completely missing.” It just seems like, hey, you kind of chug along and do well for a while. There's nothing wrong with that, but when I was reading it, I didn't get hit in the face with alpha.

I realize not everything has to hit you in the face, and maybe that's not the point, but that was kind of what I was looking at here. What would you guys say to that pushback?

I think I'm happy to start with 2 comments, and then EJ and Bob, if you want to add on. First, management has historically been very conservative, as I alluded to earlier. While they may guide toward that, they are not assuming any benefit from the connected-worker revolution or from the improved economics.

We also look at that with the SCBA replacement cycle, where management does not like to talk about the upside from the upcoming cycle, even when you look at the prior cycle. However, this is going to happen, especially because it is legally mandated.

When you read through the transcripts—and I think this is part of the reason why this is an opportunity—it doesn't look super exciting. But when you look underneath the surface at the business segments themselves, the company has performed very well and is well positioned to do that.

The other comment is that when you look at a lot of the market's consensus or beliefs around what is happening, they treat both the MSA Plus and detection subscription revenue, as well as the upcoming replacement cycles, as a call option or potential upside, rather than something that's necessarily going to happen with the business.

And so management is also talking about it in this way. While we believe these changes are actively occurring, especially with the SCBA replacement cycle, newer sell-side coverage doesn't fully appreciate that this cycle is happening. Whereas, when you look at older sell-side analysts who've been covering the company for a longer period of time, they do give more credit to the company for doing that.

And so I think that this is a case where we believe MSA's products are really differentiated in both detection and fire safety, but the market isn't giving them full credit for that.

Yeah, I guess another thing I would point to a little bit is just the timing of it all. I think that this is probably better for a patient investor. I think a lot of what we have uncovered is longer-term impacts that will benefit the stock in the long term. Obviously, our base case goes out 5–6 years.

I think as we were workshopping this and presenting it to different investors throughout the semester, that was a pain point that came up a couple of times. If you think about our thesis points, we're very confident in this kind of connected-worker revolution playing into the hands of MSA. We're very confident in the replacement cycle playing into the hands of MSA. Neither of those is going to happen next year, and so that's where, as you look at the stock, you're not getting really excited about something that's right about to happen.

These are things that are going to play out over the 2027, 2028, 2029, and 2030 time frame. If you look at our base case, a lot of our thesis points have a very slight negative impact in the early years, and then that really rebounds, kind of J-curves, into a positive impact in the later years. That's just something to be cognizant of, I think, when you think about MSA.

You know, I definitely hear you, especially in these markets. It feels like it's so short-term-focused, and everything is just momentum and trading on the quarter. I definitely hear you on having the longer-term outlook, but at the same time, it is trading at a pretty rich multiple, and it doesn't seem like growth is really accelerating.

I look at that and say, “Hey, is the market that inefficient that they're doing these things, and there is this growth cycle in 2028, or a little bit of growth acceleration in 2028, and it's just too far off to discount it? Or is the market just kind of saying, ‘Hey, nice business. This is about right’?” I just don't know the answer, but that's the thing I weigh and think about here. EJ, were you trying to say something as well?

Yeah, I'm happy to talk more about it. I think Craig and Bob covered it nicely. On the long-term horizon that you talk about, I went to the University of Chicago for undergrad, so I'll never claim that the market isn't efficient. But it is many trends that play out over many years that need to happen, and, as Craig said, MSA doesn't have to do anything particularly well, or the market trends don't have to particularly surprise in a positive way.

Not much has to go well for our base case to necessarily play out, is what we think. That's what I have to say about where the alpha may or may not lie.

Cool. It looks like you had a lot of fun. Your deck is littered with photos of you visiting MSA and doing different things, and you're all wearing fire helmets and everything. I think my daughter would think you guys are superheroes based on how many fire helmets and stuff you had.

I'd love to just talk to you for a second about the primary research you did. Obviously, you did these visits, talked to management, and talked to experts. Let's just hear about the primary research you did as part of this project.

Yeah, I think this is an opportunity to thank investor relations and MSA itself for all the access they gave us over the months that we spent researching the company. This is another benefit of looking for smaller businesses in general: the access that we were able to get.

One of our takeaways from visiting headquarters and thinking through the business was that a lot of the disclosures—and this was feedback that we had heard from talking to other investors as well—were inconsistent or made it difficult to track some of the changes that we were saying are happening, both in detection and fire safety. But when management works through the examples and shows the products and how they're integrating into their customers' businesses, it makes the use case for a lot of these products really clear.

Additionally, when talking about a lot of their investments and their vertical integration in the factories, we were able to learn about some of the advantages they have as a result of this, and we gained more conviction as a result of learning just how much better their products are.

In learning more about that and talking to customers, especially on the fire safety side, there were a lot of online documents that we were able to go through, research, and find insights into just why their SCBAs are so much better, and similarly in detection. These were opportunities where we had to go really into the details and have those numbers and our insights confirmed by management through all the conversations we were able to have with them.

You know, one thing that you guys have in your primary research, which is unique—and I use these a lot, but I always go back and forth—is that you guys had a lot of things from Reddit. I'm looking at Reddit's r/firefighting, with comments talking about, “Hey, need SCBA advice. Looking at the early stages. Need mask-fit advice.” All this sort of stuff.

You guys also have a lot of tracking on the MSA career board to inform what kind of work they're doing and where they're going. I'd love to hear how you thought about doing that research, having it inform your views, and all that sort of stuff.

Because from my standpoint, I'm of two minds. It's out there in the public domain, so is it not priced in? And with Reddit, you tend to get either the biggest fans or the biggest detractors. I'm always worried that if I'm scraping it, I'm getting a really biased sample on one side or the other.

I know you guys weren't looking for people who are stock-focused; you were looking for people who are actually using SCBAs. But if I saw five people say, “Oh, this mask sucks,” I'd say, “There are 5,000 masks out there. Maybe these are just the five who have weird faces or something.” So how did you think about using the scrapes and all this sort of stuff in informing your views and diligence?

Yeah, I'm happy to talk about this on the SCBA side, and then EJ, share your thoughts if you have anything to add on detection. I think that we looked at it as a way to reinforce what we were hearing from the company, from the sell side, and from firefighters themselves, rather than driving our entire viewpoint.

When you look at SCBAs, one of the potential opportunities—especially since we're not firefighters ourselves—was that when we would talk about this in practice, pitching to other investors, the question came up: How is their SCBA actually better, or is it really that different? What we found through Reddit posts was firefighters discussing how much more they enjoyed using MSA's SCBA, which was then verified by firefighters themselves.

At the same time, it was also possible to go out and talk to firefighters. For example, we spoke to someone at Cal Fire who uses the Scott MSA or Scott SCBA, and heard that, yes, they might use the Scott SCBA, but they still had access to and experience with MSA's SCBA, and truly believed it was better and differentiated.

That primary research and looking at Reddit was an opportunity to confirm some of those views and get more viewpoints on why MSA's SCBA is so much better.

Yeah, just to add on to what Craig said, I completely agree. I think the way we perceived this was in a confirmatory way. One thing that management said is that, 4 or 5 years ago, barely any of their engineers were software engineers, and nowadays 40% of them are.

That motivated our job-board search. This is a company that's very much turning into a tech company, and it should be priced as such, which is part of our thesis, but that's a parenthetical aside. Another thing that we kept hearing, both from investors and from MSA themselves, is how much they value this voice-of-the-customer approach and co-developing things with firefighters.

In fact, if I'm not mistaken, one comment that popped up in one of the forums, whether it was Reddit or a firefighter forum, was, “Man, these guys are really invested in getting to know us,” or something like that, about how they're almost fanatic about building those relationships. So, in a confirmatory way, as Craig mentioned.

That's great. No, look, it's really interesting, because the other thing that strikes you is what EJ just said. This is a personal theory of mine, but old-world businesses—AI is going to be the best thing for them in 15 different ways.

You know, they’re probably over-engineered, and they probably get that. They’ve got a lot of data—and we were talking about this when we were starting—that historically has probably been under-optimized, particularly if you’re selling to government. All of a sudden, they might be able to unlock it, and the customer relationship is still tied to a physical product. AI can’t replace any of that, but it just seems like there is a lot of technological upside there.

But I might be too galaxy-brained or hitting it too hard. This has been great. Do you guys see anything else we should be talking about, or anything else on MSA you think we glossed over?

One thing, as we talked about some of the unique work that we did, is that Craig did a really good job putting together this map of where the big fire departments are, where the big fire stations are across the country, and what that halo effect looks like. He alluded to this briefly before, but we uncovered this trend where you have Tier 1 fire departments. For example, MSA recently won some big Los Angeles-area Tier 1 fire departments, and you start to see Tier 2 and Tier 3 departments in the same general area adopt the same SCBAs that the Tier 1 fire departments recently purchased.

So we think that’s another reason for confidence in terms of MSA gaining share in the SCBA space on the fire side, because they’ve been winning a lot of pretty high-caliber Tier 1 fire departments. As we talk about different primary research and unique work we did, I think Craig did a great job with that analysis. So, Craig, I’ll let you take it over.

That makes total sense. I mean, it is a great map. I remember this because Memphis is right in the middle, and it’s kind of the only city that’s caught in the middle. It makes sense, but at the same time, I’d love for you guys to explain it.

So, when I win in Memphis, the argument is, “Hey, that’s the Tier 1.” And then all the little cities and towns around Memphis are more likely to switch to my product. You can tell me if I’m saying it wrong, but what’s the thesis on why that works?

Because on one end, that makes sense, but on the other hand, if I were 3M and Memphis went with MSA, I’d still be like, “Cool, that city or town outside of Memphis still makes a ton of sense for me to just go and try to compete and keep my product in there.” And I’m dealing with a completely different buyer, so I can see both sides of it. What’s the theory there, and how do you guys think about that?

Yeah, I think the theory there—which is what happened in the past, in the previous cycle—is that an SCBA is a piece of equipment that a firefighter uses every single day. In most cases, you’re not competing on price; you’re competing on functionality and the interoperability that fire departments want to maintain with neighboring fire departments.

These large city-based fire departments undergo extensive product testing and evaluation, where they figure out which SCBA they’re going to upgrade to, and these smaller surrounding fire departments don’t have the same resources to go out and do that. So they’re piggybacking on that testing and product evaluation and also aiming to maintain their interoperability, where they can switch out and maintain those units when they’re fighting fires within the same area.

Is this too crazy? I’m from Kenner, which is a suburb of New Orleans. Is it too crazy to say, “If there was a massive fire in Kenner—a massive, massive fire—the firefighters from New Orleans would be pouring into Kenner to help out?”

So the interoperability isn’t just—my original thought was, “Oh, because the guys from New Orleans might retire out into Kenner and work 2 years before they retire, you want the interoperability for that.” But it actually might be a critical safety concern. Or am I completely wrong? Is that taking it too far? Kenner and New Orleans—Kenner is 20 minutes away. The firefighters aren’t coming there even in a huge emergency.

Yes, you’re correct that firefighters often will cover a large geography, and especially in very large fires, they’re pulling firefighters from as many fire departments as they can possibly reach. Importantly, going back to the safety element, when you are at a surrounding-area fire department and you see the large city-based fire department make that upgrade, you also want access to that same leading-edge technology. Firefighters themselves are also pushing to get access to the best equipment and following those larger fire department decisions.

Fantastic. That’s awesome. Cool. All right, guys. Oh, go ahead—you take it, please.

Sorry, just very quickly. The last thing, since you asked whether there was anything else we should briefly touch on: the very last thesis point is that, in 2023, they divested their product liabilities. As a percentage of EBIT, they were paying a litigation tax of 17% every year in product liability claims, which is basically equal to 1 year of growth capital, whether it’s spent well or not.

Every 5 to 6 years, basically, you had money being thrown out at 0% ROIC that now is, at the very least, at positive ROIC. When we were talking to the company, they said their priorities are reinvesting in their products and maintaining their category leadership, beating out their conglomerate peers on product leadership, and working on the durability of their moat. They also mentioned share repurchases, dividends, and opportunistic M&A where possible.

If you model the way R&D has been invested in, both expensed and capitalized, and you were to extract a trend line before the divestiture, you can see there’s a step-up there. Obviously, we talk about how great the products are. We think that’s going to drive ROIC from the high teens into the low 20s.

Secondly, it’s got over 5 decades of experience growing its dividend every year, and we have no reason to believe that’s going to stop. Last but certainly not least, they just announced their largest-ever share repurchase, of $500 million, at the beginning of the year. Those things aren’t as fundamental and certainly not as critical as their innovations in detection and fire safety, but we’re seeing that step-up function in their competence as capital allocators, and not only as operators.

Perfect. Cool. Cool. Well, hey guys, this has been awesome, and I think you’re the only team where everyone is going into value investing and investing for the summer. So it’s nice to talk to people who are actually—

Sorry to disappoint you. I’m going to do investment banking. I’m on the dark side, but—

EJ.

But I couldn’t be more excited for that summer, and I couldn’t be more excited to continue learning about value investing and to see what Bob and Craig get up to.

Cool.

Sorry to disappoint.

Well, guys, I hope you have a great summer. This has been great, and congrats on being finalists. Have a good one, guys.

Thanks so much, Andrew.