In a world of participle-parsers, there's peril in being blunt.
Witness yesterday's fiscal Q3 earnings report from industrial parts supplier MSC Industrial Direct
- First, CEO David Sandler observed: "Our customers have become more cautious about the outlook for their businesses, as the effect of a slowing economy is increasingly felt across our customer base." (If you don't believe him, check out what UPS
(NYSE:UPS)and FedEx (NYSE:FDX)have been saying about the economy lately.)
- Second, Sandler noted that "there will be 64 business days in the fourth quarter of fiscal 2008 compared to 68 business days in the fourth quarter of fiscal 2007, which is estimated to reduce fourth quarter fiscal 2008 net sales by $28.0 million."
The stock promptly tanked nearly 4%, on an up day for the market. I'm guessing that investors combined management's two points, then concluded that sales will drop in Q4, and that MSC is trying to lay off the blame to a numbers game.
That couldn't be farther from the truth.
Fact is, MSC said plain as day that troubled economic times like these, which make customers fearful of holding inventories, are in a sense a plus for MSC, which facilitates just-in-time deliveries of spare parts. The same may also go for peers like Applied Industrial Technologies
In addition, MSC can't control the calendar. If there will be four fewer business days in Q4 this year than last, blame Pope Gregory XIII -- not MSC.
Allow me to be direct
Whatever you think of MSC's cautionary statements regarding the future, its performance in Q3 was nothing short of outstanding. Sales rose 6% year over year, or about 8% on a sales-per-day basis (that blasted calendar again.) Operating margins tacked on 100 basis points, helping to push operating profits up 12%. And thanks to continued stock buybacks, per-share profits leapt 17% to $0.81.
Finally, and perhaps most importantly, these are high-quality profits we're talking about. Free cash flow backs up nearly 100% of reported net earnings under GAAP. So pardon me for being so blunt, but at around 15 times trailing earnings, and with growth still projected to approximate 16% per year over the next half-decade, MSC's a B-U-Y.