Another one of my portfolio holdings reported today. This time it was industrial supplier MSC Industrial Direct (NYSE: MSM). As has often been the case, management's initial guidance proved conservative and the company beat expectations. Nevertheless, the market didn't exactly do handsprings over the results -- probably because the valuation (and expectations) were already high and this is not a management team that is really going to give ebullient guidance that gets everybody fired up.
As an industrial supply company, it probably will not surprise anybody to hear that the 2009 was a very tough year. Consequently, even with a tepid economic recovery, the company is benefiting from some very easy comps.
Revenue this quarter rose 28.5% as reported (to over $450M), and was up 26.5% on a per-day basis. Gross margins weakened just a bit, from 45.9% to 45.5%. Interestingly, about half of the growth came from the company's large customers, with the other half come from the much larger number of smaller companies. To a large extent, this confirms a lot of what I've been seeing about the economy - namely, that the bigger companies are recovering relatively better than the smaller ones.
This is a company famous for efficient management, and operating income jumped about 56% to 70.4M. As you might imagine, the results of this growth filtered on down through the rest of the income and earnings lines.
Cash flow was not great in this quarter, but that does not worry me. First, quarter-to-quarter cash flow is just not something I worry about because there are so many eccentricities and timing artifacts that create problems. Second, as part of the recovery in business, I expected to see higher accounts receivables and inventory levels and that does not help operating cash flow.
Management gave more of its customary guarded optimism with the release. Earnings guidance was modestly positive and I would expect the company to outperform those expectations once again. So, to the extent that the company has control over its business (which is tenuous given how reliant it is upon overall manufacturing and economic health), I feel pretty good about the rest of this year.
As I said, it is not a cheap stock and it can be pretty volatile. I figure that these shares are worth something in the vicinity of $58/share. That number could go up a bit as I update in the wake of this quarter, but I doubt it will go up much. So, with all that in mind, I'm happy to hang on for now.
Other similar companies like W.W. Grainger (NYSE: GWW) and Applied Industrial Technologies (NYSE: AIT) are certainly cheaper, and maybe some would argue that Grainger is just as good. WESCO (NYSE: WCC) is likewise a great play on economic recovery, but the stock has already had a hell of a run and is not exactly dirt-cheap. I suppose you could also throw Airgas (NYSE: ARG) and Anixter (NYSE: AXE) into the analysis, but they do not excite me after the runs they have already had. All in all, I'd rather pay up for MSC, but WESCO could still be interesting if you think the economy will avoid a double-dip.
Disclosure - I own shares of MSC Industrial
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