MSC Industrial Accelerating Sales Growth and Positive Tone Bode Well for Shares

MSC Industrial Direct Co., Inc.

Accelerating sales growth, an EPS beat, and positive management tone drove MSC Industrial shares up nearly 5%. EPS were $0.02 ahead of the Street, although the bar was low due to weather fears. The headline was accelerating organic sales growth in March to 10% and guidance for 7%-9% growth in the fiscal third quarter. Management said that metalworking demand has improved “considerably” and cited a rising Metalworking Business Index and more-optimistic customer tone. Also encouraging, the federal government is spending again, and on easy compares, MSC delivered double-digit government growth.

March organic sales growth of 10% is a nice acceleration from 5% in October and 5.5% in November. Underlying activity is improving, and MSC has a positive outlook for the second half. March did benefit from the timing of Easter and possibly pent-up weather demand. April growth should ease some, but our sense is 7%-9% growth is realistic for the quarter.

MSC continues to see strong realization of its 3% Big Book price increase, but mix to national accounts/ government/vending is an offset. Second-quarter pricing improved to roughly 1% with help from a modest mid-year price increase. Implemented in February, the increase was selective to offset supplier increases and was smaller than usual. MSC did not enjoy a midyear price increase in 2013 so year-over-year gross margins should see a small boost.

MSC guided fiscal third-quarter gross margin to 46.0% plus/minus 20 basis points. Oneoff lower reserves and favorable rebates provided a 30- to 40-basis-point lift to second quarter gross margin at 46.4%.

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