Shareholders Should Be Pleased With MSC Industrial Direct Co., Inc.'s (NYSE:MSM) Price

With a price-to-earnings (or "P/E") ratio of 24.9x MSC Industrial Direct Co., Inc. (NYSE:MSM) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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MSC Industrial Direct could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for MSC Industrial Direct

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MSC Industrial Direct.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as MSC Industrial Direct's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 34% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 15% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

With this information, we can see why MSC Industrial Direct is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From MSC Industrial Direct's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of MSC Industrial Direct's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with MSC Industrial Direct.

You might be able to find a better investment than MSC Industrial Direct. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.