Report
Brian Bernard
EUR 850.00 For Business Accounts Only

Morningstar | MSC's Newly Formed and Nascent Mexican Distribution Business Is an Attractive Growth Opportunity

Since its initial public offering in late 1995, MSC has increased its top line at an impressive 11% compounded annual growth rate. Over the past 20-plus years, MSC has become one of the largest industrial distributors in U.S., and the company is especially well-known in the metalworking industry, where the firm enjoys 10% market share. MSC has historically been a conservatively capitalized company, but it is not afraid to flex its balance sheet when the right opportunity presents itself. Indeed, the company spent $900 million to acquire J&L Industrial Supply in 2006 and Barnes Distribution North America in 2013, which bolstered its metalworking and inventory management products and services. In our view, these acquisitions were prudent uses of capital that improved MSC’s competitive standing.Although soft industrial end markets and a weak pricing environment hindered MSC’s performance between 2015 and 2017, the firm's top-line growth meaningfully improved in 2018 (6% organic growth and 5% acquired growth). Over the longer term, we expect solid end market demand and improved pricing and for MSC to gain market share from smaller local and regional distributors. MSC's newly formed Mexican operation should also bear fruit as the business matures.Because MSC has national scale and a robust portfolio of products and value-added inventory management services, we think the company is well positioned to capitalize on the growing trend of manufacturers consolidating spending with large distributors. Although national accounts can generate lower gross profit margins, they can also generate higher volumes, which MSC can leverage to improve operating margins. MSC’s focus on providing inventory management solutions has helped the firm grow customer wallet share over the years, and we expect that trend to continue.MSC has proved to be a consistent free cash flow generator throughout the business cycle, and in our view, the company has allocated its free cash flow in a balanced, shareholder-friendly manner. Going forward, we expect MSC to continue to use its free cash flow to grow its regular dividend, repurchase shares, and occasionally pay special dividends.
Underlying
MSC Industrial Direct Co. Inc. Class A

MSC Industrial Direct Co. is a distributor of metalworking and maintenance, repair and operations (MRO) products and services. The company provides stock-keeping units through its eCommerce channels, including its website, mscdirect.com; its inventory management solutions; catalogs and brochures; and call-centers and branches. The company's range of MRO products includes cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components, and electrical supplies.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Brian Bernard

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