MSC Industrial Direct Is Setting Up For a Nice Rebound Trade
MSC Industrial Direct Co. Inc. (NYSE:MSM) stock has dropped 12 percent in just a few short trading sessions. But I think that the stock could rebound for a nice profitable trade over the next few weeks once the bleeding has stopped.
Who is MSC Industrial Direct you ask? Well they market and distribute metalworking, and maintenance, repair, and operations [MRO] supplies primarily in the United States. Its MRO products include 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 offers approximately 685,000 stock-keeping units (SKUs) through its master catalogs. It has weekly, monthly, and quarterly specialty and promotional catalogs and brochures. It also is on the internet, with websites comprising mscdirect.com, mscmetalworking.com, and use-enco.com. It serves customers primarily through its distribution network of 105 branch offices and fourteen customer fulfillment centers. In addition, the company distributes approximately 55,000 SKUs of products, including fasteners and other consumables for customers across manufacturing, government, transportation, and natural resources end-markets.
The company primarily competes with Applied Industrial Technologies (NYSE:AIT) and Grainger (NYSE:GWW). While MSC Industrial has a higher operating and gross margin than both Applied Industrial Technologies and Grainger. However, MSC Industrial is more expensive on a price-to-earnings multiple basis than both Grainger and Applied Industrial Technologies. So why consider MSC Industrial here? Well the stock has been dropping in a weak market climate and the earnings were in line with a miss on revenues. This has hurt the stock. But it has growth and I think a profitable rebound trade can be made.
In its third quarter, net sales were $720.5 million, an increase of 13.1 percent over net sales of $636.9 million in the same quarter a year ago. Adjusted operating income for the fiscal third quarter 2014 was $107.3 million, or 14.9 percent of net sales, compared to $106.6 million, or 16.7 percent of net sales in the same quarter a year ago. GAAP operating income for the fiscal third quarter 2014 was $104.9 million, or 14.6 percent of net sales, compared to $100.2 million, or 15.7 percent of net sales in the same quarter a year ago.
Now when we exclude the after tax effects of non-recurring costs, adjusted net income for the fiscal third quarter 2014 was $66.2 million, or $1.06 per diluted compared to $66.7 million, or $1.05 per diluted share, in the same quarter a year ago. GAAP net income for the fiscal third quarter 2014 was $64.7 million, or $1.03 per diluted share, compared to $62.4 million, or $0.98 per diluted share, in the same quarter a year ago. Erik Gershwind, President and Chief Executive Officer, stated:
Our strategic growth programs continued to drive share gains during our March through May third fiscal quarter against the backdrop of continued improvement in overall market conditions. We would characterize the current demand environment as one of moderate growth, despite the soft pricing environment. We are performing well against our strategic plan, executing on our critical growth and infrastructure initiatives and capitalizing on our share gain initiatives to improve revenue growth as the demand environment continues to firm. We are building an exciting story within the Class C Solutions Group and delivering against the financial commitments we set for the business. Additionally, we are moving our overall portfolio of business towards high retention channels including VMI, vending, Class C and mscdirect.com. All of this builds towards an exciting story for the coming years.
So where is the stock going? In the short run probably lower as the weak hands exit the stock. However, once the stock hits about $85 a share, I think some buying is warranted. The company expects net sales for fiscal fourth quarter 2014 to be between $718 million and $730 million. At the midpoint, average daily sales growth is expected to be 7.5 percent. The company expects adjusted diluted earnings per share for the fiscal fourth quarter 2014 to be between $0.98 and $1.02.
Disclosure: Christopher F. Davis holds no position in MSC Industrial Direct or any other stock mentioned in the article and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock at $85 and a long-term price target of $100.