Please ensure Javascript is enabled for purposes of website accessibility

Why MSC Industrial Direct Co Inc Stock Just Plummeted 17%

By Rich Smith – Updated Jul 12, 2017 at 12:13PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earnings didn't exactly disappoint, but guidance did.

What happened

Shares of metalworking and power tools distributor MSC Industrial Direct Co. (MSM -0.64%) opened sharply lower on Wednesday following the release of the company's third-quarter earnings results. As of 11:30 a.m. EDT, the stock was down 17.2%.

So what

MSC Industrial reported its fiscal Q3 earnings before the market opened this morning. Sales increased 2.3% to $743.9 million, just shy of Wall Street's expected $745.4 million in sales, while profits were $1.09 per share, up 3.8% year over year and matching analyst estimates.

Company CEO Erik Gershwind provided an upbeat spin on the results, noting that MSC's market "improved through the quarter as the manufacturing economy continued to firm with improving sales growth across all of our customer types." Furthermore, "this momentum sustained into June, the first month of our fiscal fourth quarter. Customer feedback was consistent with a trend of steady and moderate improvement."

In this positive environment, MSC is now predicting its sales will run between $732 million and $746 million in its fiscal Q4 -- growing about 7% year over year -- while profits are likely to come in between $0.97 and $1.01 per diluted share. For context, that translates into better sales than analysts had been expecting for Q4 -- but worse profits. The consensus on Wall Street, prior to this guidance, had been that MSC would earn about $1.06 per share this current quarter.

Bull and bear face off

Last quarter's earnings were bovine for MSC Industrial, but next quarter's look more ursine. Image source: Getty Images.

Now what

So why is MSC stock down? In a nutshell, I'd say it has little to do with the sales shortfall last quarter (because those missing sales are showing up in Q4 instead). Rather, MSC stock is down because analysts had told investors to expect 4% earnings growth this quarter -- but MSC is saying its earnings will instead decline by about 3%.

Is that an overreaction?

Ordinarily, I'd say so. But here' s the thing: With Q3's results in hand, MSC stock currently sells for 17.7 times earnings. That might not seem too expensive for a stock that is growing earnings, but MSC says its earnings will be shrinking this quarter instead. Furthermore, MSC's free cash flow of $187 million means the company is currently generating only about $0.80 in real cash profits for every $1 in GAAP profits that it reports -- so it's not even really earning as much as it appears to be earning.

In short, while MSC Industrial is doing fine as a business, in my opinion, its stock costs too much for the profits it's making. I think investors are right to sell. Of course, the analysts in our One and Stock Advisor services may not agree, as it's a current recommendation.

Rich Smith 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MSC Industrial Direct Co., Inc. Stock Quote
MSC Industrial Direct Co., Inc.
$72.81 (-0.64%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.