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Old 11-07-2019, 12:34 PM   #124
Mr. Wood
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Join Date: Oct 2013
Posts: 9,830
MSC Industrial Boosts Dividend 19%, Releases Q3 Fiscal 2019 Results

MSC Industrial Supply (MSM) [hereafter MSC] reported its 3rd quarter fiscal 2019 results this morning. Highlights from the earnings release are below:
Quarterly revenue up 4.6% year-over-year
Quarterly EPS up 3.6% year-over-year
Declared quarterly dividend of $0.75/share, up 19%
The revenue number above is decent. Quarterly EPS growth of just 3.6% leaves much to be desired. But the significant dividend boost is positive news for investors and puts MSC's dividend yield at 4.1%. The ex-dividend date is July 22nd.

The company's CEO Erik Gershwind had the following to say about the recent quarterly results:

"Our fiscal third quarter performance leaves us disappointed. We have seen a step-down in demand since April, while the pricing environment remains uncertain due to the overhang of tariffs and trade. In response to near-term trends, we have implemented a three-part action plan to 1) improve field sales execution and accelerate new account implementation; 2) increase profitability of our supplier programs; and 3) drive increased expense control and productivity."

The company's guidance for the 4th quarter calls for sales growth of 2.2% and EPS of $1.21 to $1.27. The midpoint of 4th quarter EPS guidance is 3.9% lower than the company's EPS in the 4th quarter of fiscal 2018.

MSC has had EPS decline in several years since 2009 (2013, 2015, 2016), yet managed to compound its EPS at 11.0% annually from 2009 through 2018. Fiscal 2019 is shaping up to be a year of positive but weak EPS growth (expected EPS of $5.23 versus $5.10 in 2018 for 2.5% expected growth).

We expect growth of around 6% annually over the long-run, well below the company's history over the last decade, but better then current results.

The stock is currently trading for a price-to-earnings ratio of 13.8 using expected 2019 EPS of $5.23 and the current share price of $72.27. This is well below the security's historical average price-to-earnings ratio over the last decade of ~19. We believe a fair price-to-earnings ratio for MSC is around 18. If the company returned to its fair value price-to-earnings ratio over the next 5 years, this would add 5.4% to annual returns.

Putting it all together, MSC just announced a significant dividend increase, has a long history of dividend increases, and has a solid "B" Dividend Risk score in our Sure Analysis Research Database. Additionally, the stock is offering investors total returns of 15.5% at current prices based on our 6% estimated long-term EPS growth rate, 5.4% from valuation multiple expansion, and 4.1% from the recently increased dividend. As a result, we rate MSC as a strong buy at current prices.
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