MSC Industrial Supply (MSM 77.09, -0.85, -1.09%) is trading slightly lower after the
company reported 1Q19 (Nov) earnings this morning. MSM is a distributor of
metalworking and maintenance, repair, and operations (MRO) products and
It offers more than 1 mln stock-keeping units (SKUs) through its master catalogs, weekly, monthly and quarterly catalogs, brochures, and websites. Its business strategy is to provide an integrated, lower cost option for its customers' day-to-day MRO needs. Its extensive product offerings enable customers to reduce the administrative burden of dealing with many suppliers for their MRO needs.
Its customers include a wide range of purchasers of industrial supply products, from individual machine shops to Fortune 100 companies, to government agencies such as the General Services Administration (GSA), and the Dept of Defense. Its business focuses on selling relatively higher margin, lower volume products. Product categories include abrasives, clamps, fasteners, hand tools, tubing, janitorial supplies, milling (drill bits), power tools, saw blades, and welding equipment.
Almost every industrial, manufacturing, and service business has an ongoing need for MRO supplies. MSM believes that, except in the largest industrial plants, inventories for MRO supplies generally are not effectively managed or monitored, resulting in higher purchasing costs and increased administrative burdens. In addition, within larger facilities, such items are frequently stored in multiple locations, resulting in excess inventories and duplicate purchase orders.
Turning to the NovQ results, EPS rose 27% yr/yr to $1.33, which was at the high end of prior guidance of $1.28-1.34. Revenue rose 8.2% yr/yr to $831.6 mln, which was within prior guidance of $821-837 mln. In terms of guidance for Q2 (Feb), MSM expects EPS to come in around $1.22-1.28 while revenue is expected to come in around $817-833 mln. The guidance for both EPS and revenue is below market expectations. In terms of margins, operating margin declined a bit to 12.4% from 12.9% in the prior year period.
MSM says the industrial economy remained strong in NovQ, although there is currently more uncertainty than a few months ago due to potential economic and trade overhangs and the government shut-down. Core customers and National Accounts achieved high single-digit growth, tempered by the expected weakness in Government. Product cost increases and mix were headwinds.
Looking forward, given the significant supplier price increase activity that the company has seen, MSM expects to implement a meaningful price increase later in FebQ. Given the timing of the increase, MSM expects the impact to be fully reflected in Q3 (May) and Q4 (Aug). This price increase, coupled with increasing traction from its sales transformation efforts, drives MSM's expectation of significantly higher operating margins in the second half of the fiscal year.
MSM is an interesting name to watch as it's a fairly good barometer for the industrial economy in general. It's clear they are being impacted by the government shutdown. The good news is that its commercial customer purchasing patterns are holding up well. The concern is that if the shutdown lingers for a long time, this could have a big impact on MSM in future quarters.
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