Are you a small metalworking shop that needs a new cutter? Are you a plumber in need of supplies? If so, you're probably already familiar with MSC Industrial Direct (NYSE: MSM).
MSC is one of the largest players in an incredibly fragmented market -- the market for industrial supplies like hand and machine tools, measuring instruments, fasteners, and the like. Though most of us never give a second thought to this sort of business, it is worth more than $140 billion a year, with the vast majority of that amount carved up among thousands of small suppliers.
So even though MSC faces meaningful competition from the likes of Grainger (NYSE: GWW), Fastenal (Nasdaq: FAST), Applied Industrial Technologies (NYSE: AIT), and Kennametal (NYSE: KMT), there is a tremendous amount of business to go 'round, and each company has a slightly different angle to its business. What's more, we're not talking about large capital equipment here; we're talking about small tools and the like. The average order for MSC is about $251.
MSC's path to success won't be any shock to students of business success stories. It offers a huge range of goods (over half-a-million SKUs) and provides excellent customer service, and the founding family is still involved in the business. (The current CEO is the son of a co-founder.)
As a company that has managed to succeed even in bad times for the manufacturing sector, the latest quarterly release is another of those "ho-hum, great quarter" sort of events. Sales were up almost 18%, while net income climbed 48%. At the risk of stating the obvious, then, this is a business with some serious operating leverage.
Not only is the company expanding its base business -- growing the sales force, adding SKUs, working to better exploit underpenetrated areas like California -- but management is also focused on growing the non-manufacturing business.
To that end, the company is one of only two approved suppliers to the United States Postal Service, and non-manufacturing sales were up 19% in the February quarter (roughly 28% of total sales).
As befits a company with a good operating track record, these shares are not dirt-cheap. The trailing P/E is about 21, and the EV-to-FCF ratio is about 26. Still, that doesn't seem out of line for a company with no debt, a reliable track record of growth, a return on equity of over 15%, and a decent dividend yield.
I must admit a little personal bias in MSC's favor -- this was the first company I ever looked at when I was a Wall Street intern many years ago, and I've followed it ever since. Although the stock's valuation may not merit a pick as a value play, investors who believe that the U.S. economy (particularly the manufacturing sector) is on the way up might want to take a second look at MSC.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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