MSC Industrial has had an impressive run over the past six months as its shares have beaten the S&P 500 by 10.4%. The stock now trades at $101.19, marking a 16.7% gain. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in MSC Industrial, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think MSC Industrial Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons we avoid MSM and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, MSC Industrial grew its sales at a sluggish 4.1% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
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 2.9% annually over the last five years while its revenue grew by 4.1%. 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
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Over the last few years, MSC Industrial’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
MSC Industrial doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 22.1× forward P/E (or $101.19 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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