Top Picks 2020: MSC Industrial Direct (MSM)

01/16/2020 5:00 am EST


Hilary Kramer

Editor, GameChangers

You may have never heard of MSC Industrial Direct (MSM), but it is not the new kid on the block. In fact, it has been in business for 75 years and has a market capitalization of $4 billion, asserts Hilary Kramer, editor of Value Authority.

The company is a leading North American distributor of metalworking and maintenance, repair and operations (MRO) products and services. Metalworking is the process of working with metals to create individual parts, assemblies or large-scale structures and is used in a wide range of industrial end markets.

The company also offers approximately 1.7 million active, saleable, stock-keeping units (SKUs) through its eCommerce channels and traditional marketing channels such as catalogs and call centers.

The company seeks to differentiate itself from other companies through the value-added services that MSC offers its customers in order to save money and improve productivity.

Depending on the customer’s size and needs, MSC customizes its options to address the complexity of the company’s processes, as well as specific products, technical issues and cost targets.

It accomplishes this through using modern processes such as big data and analytics to help its customers gain insight into their practices and take much of the costs out of their supply chain operations.

After years of steady results, the company’s EPS fell in the August 2019 fiscal year. On the fourth-quarter conference call, the company indicated that all end markets, except for aerospace, were weakening. This softening of demand will cause a further decline in EPS during the August 2020 fiscal year.

I still believe that the stock is an outstanding value at 14.5X the $5.00 EPS estimate for the August 2020 fiscal year. Since fixed expenses, such as depreciation and interest payments, are a relatively low percentage of the company’s revenue, this will help the company keep its earnings relatively stable in the current downturn.

Another great defensive characteristic of the company is its strong free cash flow generation, which has equaled almost 100% of net income in recent years. This allows the company to pay a healthy dividend, with a current yield of 4.15%, and engage in share buybacks, with the company lowering its average share count by 2% last year.

If the consumer economy remains strong, the industrial sector will pick up at some point. With employment growth still chugging along, manufacturing should come back. This will be a major catalyst for the share price.

(Editor's note: In last year’s report Hilary Kramer picked Ultimate Software as her Top Pick for 2019; the company was acquired in May, for a 35% gain.)

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