MSC Stock: Boring Growth Company Worth a Look at Lower Prices

I love boring companies. I didn’t until I read Peter Lynch’s book One Up On Wall Street, in which he told readers that boring companies often make lots of money, have lots of cash flow, and are undervalued by a market looking for sexier investments.
I can’t think of a more boring company, or name, than MSC Industrial Direct (NYSE:MSM). The reason I love the company, however, is because it has nothing to do with manufacturing things. Making stuff costs money.
Instead, it does its business in marketing, repair and operations. That, along with distributions, is a far better business model.
Specifically, MSC specializes in metalworking. Its products are everything from cutting tools, measuring instruments, tooling components, fasteners, raw materials, abrasives, machinery tools, safety and janitorial supplies, to plumbing supplies, power transmission components, and electrical supplies.
And it offers a TON of these products, some 850,000 unique units. It has a massive distribution network of 103 offices and 12 fulfillment centers.
MSC makes its business on the backs of others. It provides all the stuff other businesses need to operate. It’s what I like to call an infrastructure play, and the more web-enabled they become, the more efficient their operation will be.
MSC is a big player in a very fragmented industry. Others in the industry include Applied Industrial Technologies (NYSE: AIT), Grainger (NYSE: GWW), Wesco (NYSE: WCC) and Anixter (NYSE: AXE).
This is where brand and service matter.
MSC locates its distribution warehouses near major cities so it can ship items to arrive the next day, while other companies may take longer to deliver parts. MSC is more likely to end up as a supplier, because it’s a royal administrative pain to have to order parts.
If you’re in charge of operations at a big company, you don’t want to have to track down a part through a bunch of tiny suppliers. You want a big supplier. Time is money, and because MSC saves time, it saves customers money.
In its October earnings report, the company earned $1.01 per share, up from $0.89 per share, on $726 million in revenue, up 7.8%. For the entire fiscal year, the company earned $3.76 per share, which was flat with the previous year. The pricing environment has been soft, yet MSC is so confident that the business is going to pick up that it issued a special $3-per-share dividend. This is on top of the 2% annual dividend it already pays, or $1.60 per share.
MSC can afford to do this because it has such a robust cash flow operation. The company generated more than $200 million of free cash flow in FY14, on top of $236 million in FY13, $187 million in FY12, and $185 million in FY11. It carries $47 million in cash and very manageable debt of only $240 million.
Analysts see five-year annualized growth at almost 13%. If we assume a 13x multiple to the $4.20 in earnings expected in FY15, then fair value is around $54 per share. Now, MSC stock is presently trading at $77.69. That’s a bit pricey.
I think MSC may come further down in the current market selloff and I’d look to get into the stock in the low $60s, if you can.

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