MSC Industrial Supply Co.: High Yield, Value And Growth In 2023

Key Points

• MSC Industrial Supply had a solid quarter and expanded margin. 
• FCF conversion is high and helps to fuel a high-yielding dividend. 
• The stock trades at only 14X earnings and pays 3.75%. 

MSC Industrial Supply Co. NYSE: MSM is poised to move higher in 2023 because of a relentless focus by management on execution. The company has been focused on a turn-around and repositioning strategy that has aided top and bottom-line results while delivering value to shareholders and growing the business. The takeaway for investors is that this stock trades at only 14X its earnings while paying 3.75% in dividend yield. The company is also known to repurchase shares, although those are on hold pending a potential share reclassification. 

The company’s largest shareholders, the Jacobson/Gershwind family, proposed the reclassification. The reclassification would end the dual-class structure but leave the family in control of the company. If accepted, the 10-vote class B shares would be exchanged on a 1:1.35 basis for class A shares. The proposal is under consideration by a special committee and would require approval by the committee, the board of directors and class A shareholders. 

MSC Industrial Supply Co. Advances On Strong Results 

MSC Industrial Supply Co. is a business services company focused on metalworking, maintenance and repair. The company’s $961.6 million quarterly revenue is up 11.5% compared to last year, beating the consensus estimate by $26.84 million or 2.85%. The strength is noteworthy because the 11.5% increase in revenue is a full 1100 basis points better than the IP index, which shows the company’s relevance today. While IP is growing, businesses are also leaning into upkeep, maintenance and other areas of efficiency MSC Industrial Supply Co. products and services help. 

"As we move into the back half of our fiscal 2023, there is growing momentum inside MSC which has us all excited about our future. The marketplace in which we operate has attractive dynamics and a significant total addressable market to support continued expansion. Our primary growth drivers and strong balance sheet highlight our competitive advantages to remain flexible in any operating environment with a long-term focus,” said Erik Gershwind, president and CEO. 

The margin news is also favorable to investors. The company widened its gross and operating margins to drive accelerated growth on the bottom line. The operating margin came in at 12.2%, adjusted to drive a 12.4% increase in earnings. The $1.45 in adjusted earnings beat the Marketbeat.com consensus by 660 basis points and led to an increase in guidance. The company expects growth to slow in the back half but produce 5% to 9% average daily sales growth. This is coupled with an expectation for margin expansion and free cash flow conversion greater than 100%.

Analysts And Institutions Are Moderately Bullish On MSM Stock

The analysts and institutions are moderately bullish on the stock, with the analysts rating it a Moderate Buy with a price target about 10% above the current action. No new reports have shown up on Marketbeat’s tracking tools yet, but more are sure to come. The institutions own about 74% of the stock and have been net buyers for 7 consecutive quarters. 

The price action reflects this support in the $77.50 region. This region has provided upward momentum for the price action for more than 2 years and should continue to support it in the future. The post-release action has it up more than 3.0% and at the top of the range. If the market follows through on this opportunity, there is a chance of breaking out of the range and heading up to the $95 to $100 region.