Market Overreaction Moves MSC to 4 Stars
Our outlook for the industrial distributor hasn't changed.
MSC Industrial’s (MSM) shares traded down sharply after the company released its fiscal third-quarter results and fourth-quarter outlook. The company reported solid headline figures, with sales of $744 million and earnings per share of $1.09 meeting management’s guidance and consensus estimates. We believe the sell-off was in response to MSC’s weak gross margin performance and guidance. However, we think the market’s reaction was overblown. We are maintaining our $91 fair value estimate, which puts MSC in 4-star territory.
MSC’s third-quarter gross margin came in at 44.3% versus 45% in the year-ago quarter. Management expects the fourth-quarter gross margin to compress 50 basis points sequentially to 43.8%. We believe the market is worried that MSC’s gross margin compression is indicative of increased competition from Amazon Business (AMZN) and others; however, management said the third-quarter gross margin was negatively affected by a mix shift to lower-gross-margin national accounts and vending.
Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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