I have spent plenty of time praising industrial supply company MSC Industrial Direct (NYSE: MSM), so I won't bore you with more paeans about how I like this company and its management. That is particularly true now that the company has delivered iffy guidance and the stock has done so well of late.
In most respects, this was a fine quarter for MSM. Sales were up almost 23%, and operating income jumped over 51%. Along the way, the operating margin expanded from 13.3% last year to 16.3%. From an operating perspective, then, there just isn't much to fret about right now.
But then there's the guidance. The company talked about tougher comps in its core business and specifically mentioned a slowdown in government business. Adding that all up, the sequential growth picture is not looking so good. Moreover, because the government situation is not likely to change soon, growth could be diminished for a few quarters. That was enough to send the stock down a few bucks early in trading and led Bank of America to downgrade the stock.
The next quarter will represent an interesting challenge for the company. WW Grainger (NYSE: GWW) has continued to report strong monthly sales and though the two companies are not straight-up twins, investors will certainly ask pointed questions if Grainger keeps growing and MSM starts seeing a pronounced slowdown.
Right now, the stock is trading very close to my FV estimate ($64) and I don't see much reason to boost that target price. So, the stock is fully valued. I would be sorely tempted to sell this stock if not for the demonstrated excellence of management and the ample opportunities for market share growth and business expansion. Much as I'm a hard core value hound, I hate to sell a great company just because the stock is momentarily less exciting. So, while I may be signing up for some near-term underperformance, I think I'll be glad 3, 5, and 10 years from now that I hung on to MSM shares.
HOLD MSC Industrial (MSM).
Disclosure: I own shares of MSM
No comments:
Post a Comment