MSC Earnings: Industrial Demand to Continue Softening, but the Long-Term Picture Remains Positive

We elected to raise our fair value estimate by 6% to $106 (from $100 previously), following fiscal fourth-quarter results. We attribute most of the fair value increase to rolling our cash flow model forward by one year, in addition to slight upward adjustments to our long-term forecast and changes in the time value of money since our last update. That said, management’s fiscal-year 2024 guidance led us to modestly temper our near-term outlook. MSC MSM forecasts average daily sales growth to come in between 0%-5%, while operating margins land between 12.0%-12.8%.

In terms of our forecast, we now expect MSC to post roughly 2% sales growth in 2024, approximately 100 basis points below our previous estimate. We think industrial demand will continue to soften from current levels. In addition, MSC has exposure to auto manufacturing, which is currently working through a labor dispute with the United Auto Workers. MSC expects the latter headwind to last at least through the fiscal first quarter.

Furthermore, we expect full-year gross margins to remain at 41%, flat compared with 2023. We believe lower sales volume and price/cost challenges will offset potential margin tailwinds, such as product rationalization efforts, cost-cutting initiatives (focused on the gross margin line), and the absence of lower-margin nonrecurring public sector sales.

Indeed, some end markets are sluggish, but industrial production remains resilient. This gives us confidence that demand won’t break down in the near term. If demand were to cool further, we find comfort in the distributor model that allows for cash flow resiliency. Easing working capital requirements in slowing economic periods gives MSC the ability to preserve free cash flow.