Analysts May Have Underestimated This Stock

NEW YORK ( TheStreet) -- As a person who doesn't mind surprises, it surprised me to learn that on Thursday a company I've never heard of is going to step into the earnings confessional and may surprise to the upside.

MSC Industrial Direct ( MSM), together with its subsidiaries, operates as a direct marketer and distributor of various metalworking and maintenance, repair, and operations, or MRO, products primarily in the United States.

It offers nearly 600,000 stock-keeping units representing a range of MRO products, such as 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.

The company sells its products through its master catalogs, specialty and promotional catalogs, brochures and the Internet to small, medium, and large companies in various sectors including durable and non-durable goods manufacturing, education, government, and health care.

It's downright exciting to realize MSM is based right in the heart of what I call "the rebuilding gold mine of America," the region of the U.S. most impacted by Hurricane-Super Storm Sandy. MSC Industrial Direct was founded in 1941 and is headquartered in Melville, N.Y., with an additional office in Southfield, Mich.

Analysts have been underestimating companies like Alcoa ( AA), so why shouldn't it be possible they've done the same to a company like MSM?

The stock has had a nice run-up after a nasty mid-year 2012 correction, as the chart below illustrates. The share price recovery has been especially encouraging to director David Sandler, who as of Dec. 27 owns 218,824 shares worth over $16,618,000. MSM's quarterly revenue-per-share growth is heading in the right direction as well. MSM Chart MSM data by YCharts

The recent trend of negative or low single-digit revenue growth is a continuing concern for a number of companies getting ready to report. MSM is no exception, with a modest sales growth estimate of less than 7% and quarterly EPS (year-over-year) growth expected to be 6.3% ($1.01 per share).

The first quarter of 2013 is still pancake flat for MSM's EPS and revenue estimates, according to the analysts. That low-balling trend may be the opportunity with this kind of stock. Similar companies like Fastenal ( FAST) are also anticipated to have very little growth in the first quarter of 2013.

The question is, are the analysts' estimates correct about the last quarter and the current one? If so, is that already baked into the stocks' price? This may not be the best time to invest in a company like MSM, but it's a darn good time to become thoroughly acquainted with it.

It's selling at less than 16 times this year's predicted earnings and it has a reasonable price to earnings to growth (PEG) ratio of 1.38. MSM has a trailing-twelve-month operating margin of nearly 18%, very little debt and an operating cash flow (TTM) of over $234 million.

Levered free cash flow (TTM) as of Sept.1, 2012, was over $170 million and MSM's return on equity was a surprisingly high 24%. As I study the company I'm beginning to see it as a cash cow whose 1.5% dividend, which represents a payout ratio of only 24%, may soon be going higher.

Keep an eye on MSC Industrial Direct and study its earnings report carefully. Look at its Web site and read the press releases and news on the company. Do the same for Fastenal. They both have lucrative business models and the products they sell (by the hundreds of thousands) will be very much in demand as the northeast recovers from Sandy. Get ready, get set, but don't buy yet.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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