Strong Profts continue for MRO suppliers

During the last two and half weeks MSC and Fastenal have reported strong quarterly earnings numbers indicating continued strength in the MRO market. MSC's net sales increased 30.7% with approximately 74% of the growth stemming from the 2006 acquisition of J&L. Comments from MSC CEO David Sandler indicate a sense of optimism in the industry noting that "We are especially pleased with our financial performance, despite the prevalent softness of the industry reflected in seven months of weak ISM index reports. Although market conditions have not changed, the two most recent ISM index reports show more optimism in the market. We are not currently seeing that optimism reflected in our ordering rates from customers, however, history shows that if the trend in the ISM continues, we should see improving business conditions in the upcoming months."

The ISM manufacturing report for the last two months stood at 55% and 56% respectively. Figures greater than 50% indicate market expansion.

MSC's gross profit margin of 53% during the most recent quarter also reflects the company's ability to pass along increased prices to customers.

Fastenal was able to grow sales by 13% and profit by 15% in the most recent quarter according to their quarterly report which was released Thursday.

M&A and B2B Distribution

In the last two years mergers and acquisitions announcements have dominated the business news, as a wide array of private equity groups and strategic players have snapped up companies. Despite the feverish pitch of today's M&A activity I believe that significant consolidation is still on the horizon in the MRO supply and distribution sectors.

Grainger's (GWW) President and COO Jim Ryan recently told a group of analysts that Grainger is poised to take a greater share of the $145 billion MRO market in North America. Grainger is the current market leader in the industry with only 4% of the market share ($5.9 billion in revenues in '06). Given the fragmented nature of the MRO market it is likely that a good deal of Grainger's growth will come through acquisitions. However, with attractive gross profits margins ranging between 40-46% for large MRO distributors (Grainger,MSC, McMaster-Carr) Grainger will likely be competing with other strategic and institutional investors for potential acquisition targets.

This blog will follow M&A activity within the the B2B distribution sector. Additionally the blog will follow interesting trends in distribution, supply chain management, and manufacturing. I welcome your comments and hope to foster a constructive dialogue about this unique market sector.