MSC Industrial Direct Confirms an Industrial Recovery

By Lee Samaha Markets Fool.com

MSC Industrial Direct's (NYSE: MSM)second-quarter earnings came in broadly ahead of internal expectations, and management served notice of continued growth going forward. Let's take a look at the earnings and guidance from an upbeat quarter.

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MSC Industrial Direct second-quarter earnings: The raw numbers

CEO Erik Gershwind talked of improvement after two years of a "a deep and prolonged industrial recession," and it showed up in the headline numbers from the second quarter:

  • Net sales of $703.8 million compared to guidance of $688 million to $701 million.
  • Average daily sales growth of 2.9% came in above the high end of guidance.
  • Gross margin of 44.7% was slightly ahead of the midpoint of guidance.
  • Operating margin of 12.3% was slightly above the midpoint of the guidance.
  • Diluted EPS of $0.93 was above the high end of the guidance range of $0.86 to $0.90.

In short, the numbers came in better than guidance, although given the strength in sales growth, investors might have expected a bit more on margins.

The budding shoots of recovery are in place for MSC Industrial. Image source: Author.

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Turning to third-quarter guidance:

  • Net sales of $734 million to $748 million
  • Average daily sales growth to increase by 3.5%
  • Gross margin in the range of 44.4% to 44.8%
  • EPS of $1.05 to $1.09

Clearly management is expecting conditions to continue to improve as the average daily sales growth rate is forecast to increase in the third quarter.

What happened in the quarter

In common with other industrial wholesalers,MSC Industrial has limited visibility on its future sales, therefore management's commentary is reflective of current market conditions. That said, Gershwind described an improving environment, and there is a linear pattern to it, which suggests it's part of a trend. January built on "December's return to growth," February came up against a difficult comparison from last year, but growth picked up in March.

According to Gershwind, "The growing optimism in the industrial economy has continued as the outlook has turned noticeably more positive over the past two quarters." Moreover, the improvements were across a broad range of manufacturing sectors, including its core metalworking customers.

Pricing

As noted above, margin performance wasn't spectacular, and it's partly due to what Gershwind describes as a pricing environment that "remains challenging." As a result, MSC Industrial implemented a "modest midyear price increase in February" which wasn't material to the second quarter. Moreover, Gershwind doesn't expect it to be in the third quarter, either. While pricing conditions are obviously contingent upon the strength of the recovery, investors can be forgiven for expecting a bit more at this stage.

Long-term aims

The company's goals of expanding large national accounts and taking market share in a largely fragmented industry appear to be on track. MSC Industrial's national accounts grew more than the company average, and Gershwind described the "funnel for large customers" as remaining strong.

Looking ahead

It was a good quarter for MSC Industrial, and investors will be looking for more growth in the quarters to come. The key will be to translate improving market conditions into super-profitable growththrough a combination of pricing increases and margin improvements, while continuing to further the company's long-term aims. Margin expansion is probably what investors need to focus on now.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MSC Industrial Direct. The Motley Fool has a disclosure policy.