The stock of MSC Industrial Direct Co (NYSE:MSM, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $91.85 per share and the market cap of $5.1 billion, MSC Industrial Direct Co stock gives every indication of being significantly overvalued. GF Value for MSC Industrial Direct Co is shown in the chart below.
Because MSC Industrial Direct Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.2% over the past three years and is estimated to grow 0.62% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. MSC Industrial Direct Co has a cash-to-debt ratio of 0.03, which is in the bottom 10% of the companies in Industrial Distribution industry. GuruFocus ranks the overall financial strength of MSC Industrial Direct Co at 6 out of 10, which indicates that the financial strength of MSC Industrial Direct Co is fair. This is the debt and cash of MSC Industrial Direct Co over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. MSC Industrial Direct Co has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3.2 billion and earnings of $3.63 a share. Its operating margin of 9.70% better than 83% of the companies in Industrial Distribution industry. Overall, GuruFocus ranks MSC Industrial Direct Co’s profitability as strong. This is the revenue and net income of MSC Industrial Direct Co over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. MSC Industrial Direct Co’s 3-year average revenue growth rate is in the middle range of the companies in Industrial Distribution industry. MSC Industrial Direct Co’s 3-year average EBITDA growth rate is -1%, which ranks worse than 66% of the companies in Industrial Distribution industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, MSC Industrial Direct Co’s ROIC is 11.74 while its WACC came in at 7.41. The historical ROIC vs WACC comparison of MSC Industrial Direct Co is shown below:
Overall, The stock of MSC Industrial Direct Co (NYSE:MSM, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 66% of the companies in Industrial Distribution industry. To learn more about MSC Industrial Direct Co stock, you can check out its 30-year Financials here.
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