If you know my column, you know I love boring companies. They’re often classic Peter Lynch plays, making great money with lots of cash flow and undervalued by a market looking for sexier investments. Until one day, the market learns how great a company it is, and it becomes a multibagger.
Allow me to introduce you to what may be the most boring company ever, MSC Industrial Direct (NYSE:MSM). Hey, wake up! I’m trying to tell you that this company is a gigantic marketer and distributor of a broad range of metalworking and maintenance, repair, and operations (MRO) products.
I said, “Wake up!”
OK, the idea is that MSC is involved in fixing anything involving mechanical, plumbing or electrical devices. This might include regularly scheduled maintenance, preventative maintenance or just when something flat-out breaks.
Because there are about a zillion mechanical, plumbing and electrical devices, MSC also has its own software to keep track of all these things. If you’ve ever walked into a Home Depot (NYSE:HD) and seen all the different types of light switches, you get the idea. Here’s a link to all the services MSC handles.
MSC sits on some 600,000 different “stock-keeping units,” which you and I probably think of as junk. But to MSC, it’s cold hard cash. It focuses on high-margin, low-volume products for customers ranging from machine shops up to Fortune 1000 companies, governments and the Department of Defense. The average order was $392 in fiscal 2012.
Best of all, MSC is a big player in a very fragmented industry. The others 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, its saves customers money.
So is MSC a boring company worth buying? It recently reported results, with earnings up 6%. But the CEO indicated that demand was weak in the last quarter. Why? Apparently business was literally at “near paralysis” because of uncertainty surrounding the election, fiscal cliff, GDP growth and taxes. And MSC is sticking to a pessimistic forecast for 2013.
However, I think long-term there’s a lot to like here.
Just like salvaged vehicle auctioneer Copart (NASDAQ:CPRT) revolutionized its fragmented industry with a great e-commerce platform, I think MSC is doing the same for parts. Its online platform resulted in some 40% of sales for MSC. It’s also moving heavily into vending machines — not the kind that spit out food and drinks, but the kind that spit out parts! It’s innovative, and creates harder competition for the little guys.
Things will be tough in the near term, but for the trailing 12 months, the company had free cash flow of over $150 million. More capital spending is coming with the vending machine concept, so free cash flow may slip a bit. But with no debt, getting through the slow period isn’t going to hurt MSC too much.
The downside is the stock is trading at 17x this year’s estimates. That’s higher than the 13% long-term growth projection and doesn’t take into account the expected slow period.
I think for a very long-term holding, you could buy in now. More conservative investors may want to see what the first six months of the year brings or look to buy in around $62 or so.
As of this writing, Lawrence Meyers didn’t own any securities mentioned here.