RealMoney Silver - Insider Purchases & Buybacks: MSM

Insider Purchases & Buybacks: MSM
By Jason Raznick
RealMoney.com Contributor
1/24/2008 5:13 PM EST

Whether a company offers retail or industrial products, its foundation will be tested by the general economic slowdown. In such an environment, it is crucial to note how a company performs in a challenging scenario. But we cannot study all companies. A good place to begin is to consider companies with continued buybacks. MSC Industrial Direct (MSM) has recently extended its ongoing buyback plans. (On Stockpickr, you can see the rest of the insider trades and buybacks.)

MSC Industrial Direct's board has approved a buyback of up to 7 million shares. The company had 1.9 million shares remaining from its previous authorization, which have been included in the latest repurchase plan. Since the beginning of fiscal 2003, MSC has spent $260.9 million to repurchase approximately 8.1 million shares.

The company executed well during the fiscal first quarter, and its financial performance was strong. The provider of industrial supplies and equipment reported an 8.8% year-over-year rise in net sales to $437.6 million, while net income climbed 16% to $46.9 million. The company's diluted EPS grew by 17% to 70 cents, from 60 cents in the year-ago quarter. The company also has a return-on-equity of 26% and a P/E/G ratio of 0.75.

MSC achieved good cost control during the period, which boosted its bottom line. Also, its cash generation was healthy. However, the fiscal second quarter is expected to be tough, with customers facing rising raw-material and energy costs. The company has projected its diluted EPS for the quarter to be between 68 cents and 70 cents.

CEO David Sandler said MSC is well positioned to gain market share from rivals and grow earnings against the backdrop of a general downturn. This seems slightly optimistic, however. Analysts at Robert W Baird reduced the price target for MSC to $44 from $50 while reiterating a neutral rating. The analysts said in their note to clients that although the company was taking initiatives to address a possible economic slowdown, the ISM manufacturing index was expected to remain below 50, a scenario in which MSC would find it difficult to outperform the market. Earlier in December, Bear Stearns downgraded the company from outperform to peer perform.

MSC's inventory levels have been on the rise and grew last quarter as well. The company plans to adjust inventory over the rest of the fiscal year. This could put margins under pressure.

There are a number of funds -- you can see a list here -- that own the company's stock. It is interesting to note that MD Sass Associates has recently raised its stake in the company. This New York-based firm has AUMs of over $700 million, and also owns Joy Global (JOYG) , Baker Hughes (BHI) and General Electric (GE) .

Lone Pine Capital, run by Steven Mandel, a former Managing Director at Tiger Management, is another hedge fund that has very recently increased its position in MSC. It owns a more-than-6% stake in the company. Lone Pine also owns stock in Schlumberger (SLB) , Google (GOOG) and Qualcomm (QCOM) . According to Bloomberg, in 2007, Lone Pine Capital returned 46.5%.

Shares of the company were trading above $50 until mid-October, when MSC announced earnings guidance for the fiscal first quarter short of Wall Street expectations. The company cited uncertain market conditions as the reason. Shares are currently trading close to their 52-week low of $35.03. I believe this adequately reflects the uncertainties related to an economic slowdown.

So with this company, we have a buyback, extremely smart investors and a CEO that expects to steal market share from competitors. I believe this offers value, and it is time to take a very serious look at MSC Industrial.