MSC: back on track

By Jeffrey Germanotta -- Industrial Distribution, 4/1/2000

MSC's stock price has seen its share of ups and downs in the past couple of years. We suspect its stock price trends were closely, but not completely, connected to its sales growth trends and investor perceptions related to long-term earnings. Between fiscal 1991 and fiscal 1998 (August FYE), MSC generated among the industry's strongest sales growth, recording a CAGR of 26 percent. For most of fiscal 1999, sales growth rates decelerated, averaging 12 percent. During the first half of fiscal 2000, MSC posted consistent monthly improvement, averaging an estimated 18 percent sales growth. The stock price as of this writing was $13.94, well over its $7.50 52-week low, yet short of the $21.69 52-week high.

Between summer 1998 and mid-1999, the combination of a weak industrial economy, aggressive investment, and tight cost controls to manage earnings led to a higher-than-normal employee turnover rate and a temporary decline in customer service. These events further contributed to a decline in MSC's sales and earnings growth, as well as its stock price.

During the summer of 1999, management responded with organizational changes and a revised compensation plan to foster stronger customer service and development. The company also initiated strategic relationships with several emerging e-markets. Excitement over improving customer service levels, accelerating sales growth, new strategic investments, and a growing industrial economy propelled the stock price upward until late January 2000, when it became clear the Fed would more aggressively raise interest rates to moderate inflation risks.

Barring a significant change in the direction of the economy, we feel MSC is well positioned for continued improvement in market share and sales growth rates.

Jeffrey Germanotta is senior vice president of equity research at R.W. Baird & Co., Milwaukee, Wis. He can be reached at (414) 765-3572 or e-mailed at jgermanotta@rwbaird.com.