MSC Industrial has been treading water for the past six months, recording a small return of 4.5% while holding steady at $85.74. The stock also fell short of the S&P 500’s 13.1% gain during that period.
Is now the time to buy MSC Industrial, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think MSC Industrial Will Underperform?
We're cautious about MSC Industrial. Here are three reasons why MSM doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Maintenance and Repair Distributors companies should track organic revenue in addition to reported revenue. This metric gives visibility into MSC Industrial’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, MSC Industrial’s organic revenue averaged 3.6% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests MSC Industrial might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for MSC Industrial, its EPS declined by 4.4% annually over the last five years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, MSC Industrial’s ROIC averaged 2.7 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of MSC Industrial, we’re out. With its shares trailing the market in recent months, the stock trades at 20.4× forward P/E (or $85.74 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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