Thursday, January 11, 2018

MSC Industrial Can't String Together Two Strong Quarters

With a higher valuation come higher expectations. MSC Industrial (MSM) had been enjoying a solid run since its last quarterly report, a report which brought some much-needed encouragement back to analysts and investors after a prolonged stretch of lackluster results and increasingly threadbare explanations from management. Fiscal first quarter results were unfortunately a step in the wrong direction, with the company coming up a little short on revenue and margins and management not really having a lot to say to brighten the story.

I’ve been conflicted about MSC shares for a while now, as I think the underlying trends in margins are more worrisome than management wants to acknowledge and that management’s comments on the business have not instilled confidence. On the other hand, this is a company with a long track record of double-digit returns on capital (even at the bottom of the cycle) and good share in a manufacturing/industrial sector seeing a strong rebound.

I don’t think MSC shares are ridiculously expensive, but then I also think we’re at a place in the market where you have to be more careful about company quality, valuation, and momentum (momentum in the sense of business conditions/performance, not stock performance). As I’ve said many times, I’m reluctant to part with the shares of a company that has performed well for me, but I will say I’m much closer to the exit now than the entrance.

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MSC Industrial Can't String Together Two Strong Quarters

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