A Snoozer Business With Eye-Opening Growth

When I peruse the weekly earnings reports, nothing excites me more than a reporting company that has the most boring name ever. A boring name almost certainly means a boring business.

So while you and I might want to fall asleep at the sound of MSC Industrial Direct (NYSE:MSM) — and even though I bet you have no idea what this company even does — I assure you it’s a good idea to stay awake.

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This 70-year-old company operates as a direct marketer and distributor of metalworking and maintenance, repair and operations (MRO) products to industrial customers in the U.S.. It offers 600,000 stock-keeping units representing a range of MRO products, including cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components and electrical supplies.

I know! Isn’t that exciting?!

It should be, because like companies that sell used auto parts — like Advance Auto Parts (NYSE:AAP) and Genuine Parts Co. (NYSE:GPC), another boring company — MSC makes its business on the backs of others. It provides all the crap 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’s earnings report offers exactly what I like to see in a growth company, and what I love to see in an undervalued growth company. For Q3, sales rose 15%, operating income rose 13%, net income popped 13.2% and EPS increased 13.4%. The numbers are even stronger over the nine-month period, with net income up 19.3% and EPS up 20%. These are all fabulous figures for a growth stock.

Financially, the company makes me very happy, too. MSC has $110 million in cash and no debt to speak of. Free cash flow in FY2011 was $185 million, and it’s $117 million in this fiscal year so far. MSC uses a good chunk of that cash to pay a buck per share in dividends every year, good for a modest yield of 1.5%.

Analysts see five-year annualized growth at almost 16%. If we assume a 16x multiple to the $4.09 in earnings expected this year, that gives us a price-to-earnings-growth (PEG) ratio of 1, meaning the stock is fairly valued. Considering how many growth stocks are selling vastly in excess of their growth rate, I consider MSC to be a value play. It makes a great addition to your mid-cap growth portfolio, and it’s a long-term hold.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He’s president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

Article printed from InvestorPlace Media, https://investorplace.com/2012/07/a-snoozer-business-with-breakneck-growth/.

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