They say that you should never fall in love with a stock because it won't love you back. Oh, yeah? Tell that to the long-term shareholders of MSC Industrial Direct
MSC made what I think is another savvy strategic move, announcing on Thursday that it had agreed to acquire the J&L Industrial Supply business from Kennametal
But wait, there's more.
J&L brings with it about 74,000 customers, few of whom overlap with MSC's existing customer base. J&L also strengthens MSC's presence in the central U.S. and gives it an international presence. The acquisition will also make MSC the exclusive distributor of Kennametal cutting tools -- some of the best-regarded tools in that space.
There are plenty of other ways in which this merger should benefit MSC. The company should be able to cross-sell other maintenance, repair, and operating (MRO) products into J&L's customer base and should also be able to boost J&L's margins as well. What's more, the acquisition will make MSC a meaningfully larger company, and that should give it more leverage when dealing with suppliers, which is very promising for long-term margins.
Turning briefly to Kennametal, this seems to be a profitable way of disposing of a good business that just doesn't quite fit in with what the company wants to be these days. According to Kennametal, it'll look to use the proceeds to make selected acquisitions in advanced materials or engineered components and perhaps buy back minority share interests. I also like what the company said about debt reduction -- namely, that it thinks it has a very digestible and useful amount of debt, and so it's not looking to use the proceeds for debt repayment.
Clearly, I'm a fan of MSC Industrial, and I like the long-term potential of this deal. The shares have been quite strong, though (even despite an apparently ill-timed recent valuation-based downgrade), and I can understand if fellow Fools would prefer to wait for a pullback and/or look at other industrial suppliers such as Grainger
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Fool contributor Stephen Simpson owns shares of MSC Industrial but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).