MSC Industrial Has To Offer More Than Lackluster Growth And No Margin Leverage

MSC Industrial (MSM) has continued to test the patience of its shareholders, as the company’s shares have continued to lag not only the broader industrial sector since the company’s fiscal fourth quarter earnings report, but also fellow distributors like Fastenal (FAST) and Grainger (GWW). I believe the primary issue is a familiar and long-standing one – not only is MSC lagging in terms of organic growth, it’s not showing the hoped-for margin leverage that has been a centerpiece of many bull theses. On top of that, MSC’s exposure to manufacturing is a potential vulnerability has uncertainties build ahead of the upcoming wave of guidance from industrial companies with their calendar fourth quarter reports.

I believe MSC Industrial can be better than this, which is a large part of why I continue to own the shares, but “can” and “will” are not synonyms, and investors have to consider the risk that between internal missteps and a changing competitive environment, MSC will never live up to its growth and margin potential. The shares do appear undervalued on both a DCF and margin-driven EV/EBITDA basis, though, and I believe the potential returns are worthwhile if the company truly does, at last, have its ducks in a row.

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MSC Industrial Has To Offer More Than Lackluster Growth And No Margin Leverage