MSC Industrial (NYSE:MSM) Misses Q3 Sales Targets

Industrial supplies company MSC Industrial Direct (NYSE:MSM) met Wall Street’s revenue expectations in Q3 CY2024, but sales fell 8% year on year to $952.3 million. Its non-GAAP profit of $1.03 per share was 3.9% below analysts’ consensus estimates.

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Company Overview

Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE:MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Maintenance and Repair Distributors

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, MSC Industrial grew its sales at a sluggish 2.6% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. MSC Industrial’s annualized revenue growth of 1.7% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, MSC Industrial reported a rather uninspiring 8% year-on-year revenue decline to $952.3 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and indicates the market believes its newer products and services will not lead to better top-line performance yet.

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Operating Margin

MSC Industrial has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 11.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, MSC Industrial’s annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.

This quarter, MSC Industrial generated an operating profit margin of 9.5%, down 1.9 percentage points year on year. Since MSC Industrial’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Sadly for MSC Industrial, its EPS declined by 2% annually over the last five years while its revenue grew by 2.6%. However, its operating margin didn’t change during this timeframe, telling us non-fundamental factors affected its ultimate earnings.

Diving into the nuances of MSC Industrial’s earnings can give us a better understanding of its performance. A five-year view shows MSC Industrial has diluted its shareholders, growing its share count by 1.6%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For MSC Industrial, its two-year annual EPS declines of 11.7% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q3, MSC Industrial reported EPS at $1.03, down from $1.64 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects MSC Industrial’s full-year EPS of $4.80 to stay about the same.

Key Takeaways from MSC Industrial’s Q3 Results

We struggled to find many strong positives in these results. Its EPS missed and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $80 immediately following the results.

MSC Industrial’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.