Monday, July 24, 2006

Calls of Note Part 5

BB&T Capital Markets reiterates Buy rating and $64 12-month price target on MSC Industrial Direct (AMEX:MSM). Firm thinks MSM's multiple is again at levels that have generated significant investor interest in the past, making for an outstanding entry point.
Notes they've seen this show before. On July 21, MSM finished the day with a rolling weighted 12-month forward P/E of 16.6x. The multiple has been this low on only two recent occasions: in April (finished month at 15.8x) and September (finished month at 17.2x) of 2005.

In the first case, MSC's stock rallied from around $26--$27 to $38--$39 at its peak three months later. In the second, the shares rose from $32--$33 to $53--$54 six months later.
Directionally, MSC has softened with industrials; in order of magnitude, it has fared worse. It is off 28.4% since May 5, versus an average slide for firm's 13 industrial names of 19.4% and a dip in the S&P 500 of 6.4%.

Orders out of Kennametal (8%-plus) continue to point to strong metalworking demand. MSC's earnings report of June 29 was a fair bit better than that of its distribution "Big 3" peers, Grainger and Fastenal. MSC has a unique opportunity at this point in the cycle to accelerate sales growth and dial back spending as a result of the J&L transaction. This stock should be performing better than its peers, not worse.

Notablecalls: MSM is a bounce candidate.

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