MSC Industrial (MSM, Financial) is trading slightly lower after releasing its Q3 earnings report. The company, a distributor of metalworking and MRO products, reported in-line EPS and a 7.1% year-over-year decline in revenue to $979.4 million, also in-line with expectations. About 45% of MSM's sales are metalworking products, and approximately 70% of its business is sold into both light and heavy manufacturing environments.
- MSM had previously provided downside guidance on June 13, aligning with these results. While the company sometimes offers mid-quarter guidance, it typically does not guide for EPS/revenue during earnings reports. For FY24, MSM lowered its ADS (average daily sales) guidance to a range of -4.7% to -4.3% from the previous range of 0-5%. The adjusted operating margin outlook was also reduced to 10.5-10.7% from 12.0-12.8%.
- ADS, a crucial metric for MSM, declined by 7.1% in Q3 due to non-repeating Public Sector orders from the prior year and softness in manufacturing verticals. This decline accelerated from a 2.7% drop in Q2, although MSM did see sequential improvement. The company faced unexpected gross margin pressure in the second half of its fiscal year, following the full rollout of its web price realignment and a slower-than-expected recovery in ADS, especially within its Core customer base.
- MSM responded with swift corrective actions to improve gross margins, including accelerating the rollout of its web enhancements. These corrective measures have shown positive results, with gross margin improvement in June compared to the lows in April and early May. The web price realignment initiative is now performing as planned.
- During the earnings call, MSM was asked about the outlook for heavy manufacturing. The company noted that softness is more acute in core metalworking-related end markets, including machinery, equipment, and metal fabrication. Visibility remains limited due to the short-cycle nature of the business, which is why MSM does not provide regular guidance.
The Q3 results were in-line with recent guidance, so there wasn't a significant surprise there. Investors are likely focusing more on the outlook for Q4 and FY25. While specific guidance wasn't provided, it appears that end markets will remain weak in the near term. A potential rate cut by the Fed could boost customer confidence.
On a positive note, online issues seem to be subsiding, which could help restore margins. MSM remains optimistic about its positioning in North American manufacturing, especially with macro trends like reshoring and a strengthening manufacturing footprint. However, near-term softness and limited visibility make us more cautious about industrial and manufacturing stocks as we head into earnings season.
