Thinking small can sometimes create big profits. MSC Industrial Direct
Third-quarter results reflect the boringly excellent performance I love about this company. Sales were up in the low teens, and EPS grew by over 29%. Average transaction values continued to climb, while margins improved across the board.
Keep in mind, MSC Industrial is doing this in a manufacturing environment that's somewhere around "lukewarm." Higher energy and raw-materials costs continue to pressure growth and profits in the manufacturing sector, but this company keeps plugging along.
Its balance sheet and cash flow statement are also both in fine shape. Annualized inventory turns improved by about 5% on a sequential basis, and accounts receivable have held steady on the basis of days sales outstanding.
Through the first nine months of this fiscal year, the company has generated about $80 million in free cash flow, more than doubling the year-ago performance. Opting to share some of this success with shareholders, management has announced a special $1.50/share dividend and authorized the repurchase of an additional 5 million shares.
From my perspective, there are a lot of reasons to be optimistic about this company. Online sales continue to be robust (up 42% for this quarter) and the company's upcoming new catalog includes some price increases that should help margins. Elsewhere, the company continues to target the western U.S. for expansion. It's looking to grow its sales force by only about 10% for the entire fiscal year.
MSC Industrial may not be the cheapest stock around, but I think the valuation is quite reasonable relative to the growth prospects. Given that I've followed this company since my first days as a research intern at Alex. Brown & Sons, it certainly carries some nostalgia value with me. But nostalgia doesn't feed the bulldog. Luckily, this company has plentifully delivered the goods over the past few years, and I believe they'll continue to do so.
At the time of publication, Fool contributor Stephen Simpson held no financial position in any company mentioned.
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