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MSC Industrial Supply (MSM +6%) is trading higher following its Q1 (Nov) earnings report this morning. This distributor of metalworking and MRO products bounced back nicely from an EPS miss in Q4 (Aug) to report a double-digit EPS beat this morning. Revenue fell 2.7% yr/yr to $928.5 mln, but that was much better than analyst expectations. MSM is a company that Briefing.com keeps an eye on because it provides a glimpse into the industrial economy. Roughly 45% of its sales are metalworking products, and about 70% of its business is sold into manufacturing environments, both light and heavy.

• ADS (average daily sales) is a key metric for MSM. It declined -2.7%, which was ahead of guidance of -5.5% to -4.5%. The upside was fueled by growth in the Public Sector. Also, it's worth noting that MSM had a strong November with a return to growth. While certainly a positive sign, MSM is not viewing November alone as an inflection point as the month benefited from some large orders and the timing of a late Thanksgiving.
• In terms of the macro environment, MSM noted that the IP (Industrial Production) readings across most of its top manufacturing end markets continue to contract. Automotive and heavy truck, primary metals, fabricated metals and machinery and equipment continue to be soft. Aerospace, while a net positive for MSM in Q1, experienced a step-down related to strikes that have since been resolved.
• As such, ADS was -8% in December, although it was heavily weighed down by the mid-week timing of the holidays in 2024. MSM guided to Q2 (Feb) ADS being down -5% to -3%. Adjusted Operating margin declined to 8.0% from 10.9% a year ago, although this was ahead of 7.0-7.5% prior guidance. As expected, margins were impacted by higher priced inventories working through the P&L and a headwind from acquisitions. Q2 margins are expected at 6.5-7.5%.
• MSM did provide some hope for optimism. It said that future prospects for North American manufacturing are promising, driven by an increased focus on reshoring and incremental manufacturing investment into the US. Also, MSM feels it's well positioned to help customers navigate any pressures that arise from tariff policy. Just 10% of MSM's COGS are sourced from China, and it has low-single digit exposure in Mexico and Canada.

Overall, this was a good quarter for MSM, especially its public sector vertical. It does sound like MSM benefitted from a later Thanksgiving, but the upside was quite significant. Despite the good results, MSM was cautious about near term manufacturing activity although it should benefit from long term macro drivers, like reshoring, tariffs etc.