Another quarter is in the books, and really not that much has changed at MSC Industrial (MSM). Management once again did a little better on margins, but end-market conditions remain challenging and MSC continues to underperform companies like Fastenal (FAST) in the manufacturing vertical (though this is an apples-to-oranges comparison). And once again management is looking to sell the Street on a “it’ll be different next time” strategic plan that is supposed to deliver above-market revenue growth and improving margins – something investors have heard several times in the past only to see the company under-execute and under-perform.
Valuation is where things get tricky. I’m looking for long-term revenue growth of around 3.5% and even lower free cash flow growth, as I don’t believe management will execute fully on this new plan and I believe the core distribution operations will see ongoing margin pressure. On the other hand, MSC is leveraged to a still-nascent recovery in manufacturing and those expectations still support a long-term total annualized return of around 9% to 10% a year. MSC Industrial management has a long way to go to re-earn the benefit of the doubt, but I can see some trading appeal here.
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MSC Industrial Does A Little Better On Margins, But End-Market Pressures Remain
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