Rule #1 Finance Blog

With Investor Phil Town

HOMEWORK: MSC INDUSTRIAL DIRECT CO. (MSM)

This Homework was submitted by Chad, an Investools user. Read on:

Phil,

I have noticed the investools valuation analysis numbers are much different than what I find on other sites. What numbers would you say are correct? Am I just looking at them incorrectly? For example Projected P/E for MSM. I looked at Yahoo finance and it shows a P/E 1 yr @ 19.32 but the investools shows a 1 yr P/E of 57.34. If I want an accurate assessment of P/E what should I be looking at?

I have looked into this company for a couple reasons which lead me into my 4M’s:

Meaning – Do I know what they do?

1) Yes, they supply industrial tools and equipment.
2) I myself currently buy from them for my company.


Moat –
They are one of the nation’s largest direct marketers of
industrial supplies and equipment. So let’s look at their #’s for a moat.  (All #’s from Investools)


  1. ROIC
    – 12% good because we require at least 10%

  2. Equity growth rate
    – 10.59% (I believe — if this is not correct please let me know if it’s not.)

  3. EPS growth rate
    – 14.35% 10 yr good because we require at least 10%

  4. Sales growth rate
    – 15.37% 10 yr good because we require at least 10%

  5. Cash growth rate
    – +14.4

So all these lead me to believe they must have a durable competitive advantage. Name maybe, or low price.

Management – The man who started the company has handed it to his son
and his son has grown it to what it is now. I have not been able to
find to much on Mitchell Jacobson. Let me know if you can.

MOS
– If I go by the #’s in the investools valuation analysis, which
shows 21.25% projected growth rate and 31.52 P/E, I get a sticker price
of $81.43, which half of that is what we would pay — $40.72 — but the stock
is currently going for $37.29.

MG-Zacks – 3.62
Price Pattern – 3.00

The industry is on a slow but upward trend and so is the company.

So it appears it is a good buy — what do you think?

Thanks
Chad


Chad did good work. Here’s my response:

Chad,

I just looked up MSM on MSN Money, Yahoo Finance and InvestoolsThe PE is listed at 24% on all three. The forward PE on Yahoo is at 19%.
That is different than the PE, okay?  That’s a guess of the PE based on
future expectations.

I like it that you do business with this company.  Excellent way to get
to know a business you might want to buy.  Clearly you see these guys
being in business twenty years from now and doing great.

ROIC is right.


Equity growth
is a bit off.  Just use Rule of 72 on the string of
equity numbers from 1995-2005.  It’s somewhere between 18% and 24%
depending on which year you start.  It had a big jump in equity in
1995-1996.  But if you start in 1996 you get 18%.  Let’s use that.


EPS and Sales and Cash
are right.  But remember to look not only at the
ten year number but also the 5 and 1 to see consistency.
  In this case
you have consistency and earnings are exploding.


Always make a quick check to see if they have a bunch of long term debt.
  They don’t.  Another good sign.

Your conclusion that they have moat is probably correct from the
numbers, but what is the Moat?  If you don’t know how they defend
themselves, you don’t know the business well enough to buy it. 

So, yes,
they have one.  MSC thinks they are all about customer service – giving
you what you need right now.  They pride themselves on giving the
customer everything from one source at the lowest price and see
themselves as part of their customer’s business. 

In other words, they
have a Toll Bridge/Price/Switch Moat in Business to Business direct.
 
You want it all in one place cheap, there’s only one distributor: MSC.
How do I know that?  Their website tells me.

NOTE:  Every good
business puts its moat right up front where you can see it.  Otherwise
what good is it? 
(And this is why YOU have to know what this business
is all about because they could be hyping me up on their website.  The
numbers are there to confirm that they aren’t, but it’s best to KNOW they
aren’t, right?)

Management seems good.  Son of founder is good on the surface.  But did
you read his letters to shareholders in his annual report?  Did you get
a sense of what his Big Audacious Goal is?  Is he on our side or his
side?  Huge question if we intend to own this thing for the next 100
years. 

Second page of the annual report in bold print:  Our Mission is
to be the best in the world [at what they do].  Now that, my friends,
is a BAG.
I LOVE a CEO with a BAG.  And I love a CEO who thinks
ahead.  His letter tells us owners that he built in extra capacity and
is now set up to handle an additional 50% growth without spending a
dime, and now they are going to kick butt on their competitors.  Upbeat
letter, no downside in sight.  I’d rather the guy open up about his
challenges, but maybe this last year was so killer he is on a total
roll.  All in all, I like his tone.


MOS:
Remember we go with the lesser of our estimate of growth or the
analysts:  I put growth at 18% so I’m going with that instead of the
higher analyst number.  My PE is going to be 36 or historical (2 x the
growth rate).  In this case historical is 31 so we’ll use that.  That
gives us a Sticker of $62.  MOS is $31.  Selling for $36.  That’s in
the range of a BIG MOS. HALF OFF SALE at MSM!

Love it that you are watching the group…  the big buggers are
sneaking in there, aren’t they!  But now we can see them sneaking.  Now
you get the arrows on this one, it’s a go, baby!

Wish I knew what you know about this thing.  Looks like a really good
deal but I never buy anything I don’t know first hand.  You’re just
going to have to make money on this one without me, bro.

Nice job.  Congrats.

Now go play!