While it may not be a focus for many investors, Briefing keeps an eye on MSC Industrial Supply (MSM) because it provides a glimpse into the industrial economy. The company reported disappointing Q3 (May) results this morning but also announced a dividend increase.
MSM is a distributor of metalworking and maintenance supply products. Its customers range from individual machine shops to Fortune 100 companies. Its focuses on selling relatively higher margin but lower volume products. Product categories include abrasives, clamps, fasteners, hand tools, tubing, janitorial supplies, milling (drill bits), power tools, and welding equipment.
In simple terms, this was not a great quarter for MSM as it reported EPS of just $1.44 vs prior guidance of $1.46-1.52 while revenue grew just 4.6% yr/yr to $866.5 mln, which was within prior guidance of $847-891 mln. However, the revenue was below analyst expectations. The guidance was rough as well as both EPS and revenue for Q4 (Aug) came in well below expectations.
The company admits that its MayQ results were disappointing. CEO Erik Gershwind cites a "step-down in demand since April, while the pricing environment remains uncertain due to the overhang of tariffs and trade." Gershwind did provide some positive points, saying that "[o]ur pace of account wins is strong, our vending implementations are growing rapidly, and we are deepening our commitment to our valued supplier partners."
Our overall take is that this quarter and the guidance for AugQ in particular makes us somewhat nervous about the industrial sector. Granted, MSM's earnings report and guidance is just one data point among many so we don't want to extrapolate too much. However, with what we heard from steel companies last month and this report, our bias is now leaning toward this being a rough summer for industrial companies as they deal with the effect of trade/tariff issues.
What stands out to us is that MSM saw a drop-off in April and the AugQ guidance was weak. That tells us the weakness is just getting started. We would have preferred MSM to say it stumbled early in the quarter, but trends improved later in the quarter.
On a final note, investors may ask why the stock is down only modestly given the poor results? We think the quite large 19% increase to the quarterly dividend to $0.75/sh is mitigating the impact of the results. MSM now has an annual dividend yield of 4.3%, which is quite large. So even though its market is difficult right now, we think the dividend increase is a signal from management to investors that the company is confident in terms of its longer-term cash flow outlook. MSM's dividend yield will likely now attract more investors who seek high yields.
It's clear this was a difficult quarter for MSM and the weak guidance makes us nervous for other industrial-related stocks this earnings season. At the same time, the hefty dividend increase does mitigate our long term concerns about the cash flow outlook to some degree.