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
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
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).