Keep some powder dry and try to take advantage of stocks falling in the first quarter. This is one of the findings from looking at the latest results of MSc Industrial Direct (NYSE:MSM). Distributor sales of metalworking and maintenance, repair and operations (MRO) products and services are a leading barometer of the North American industrial sector. Its latest results included a mix of warnings and opportunities for investors. Here’s the lowdown.Thank you for reading this post, don't forget to subscribe!
Prepare yourself for benefits warnings
I previously discussed the possibility of profit warnings in the upcoming earnings season, and MSC Industrial’s earnings support that view. It is one of three stocks that will be closely watched in January given the current conditions of the economy.
Unfortunately, the report was not good. The company’s fiscal first quarter 2024 ended Dec. 2, 2023, and includes September, October and November sales. In its fourth-quarter 2023 earnings presentation in October, management told investors its average daily sales (ADS) rose 1.3% year over year in September and would be 1% to 2% in October.
As the table below shows, ADSs did not rise in October, in fact, they fell by 1.7%.
Average Daily Sales Growth (YOY)
Data Source: MSC Industrial Presentations. YOY = year over year.
Given that MSC’s management gave October ADS guidance in late October, it’s fair to say that demand in the second half of the month ended up being worse than expected. Indeed, CEO Eric Gershwind acknowledged this on a recent earnings call, saying, “We ended the month down more than 1%, which reflects how much softer demand was in the latter part of October than we expected.” ” He added, “That softening continued into November, and as you can see on the op[erating] Figures in December also.”
The above table shows the dynamics. Furthermore, focusing specifically on MSC Industrial’s manufacturing sales it is clear that a slowdown is occurring.
Data Source: MSC Industrial Presentations. Chart by author.
Why were sales weaker than expected?
Discussing why sales had been so weak over the past few months, Gershwind put it down to a combination of “belt-tightening and holiday inventory burn down.” The negative impact of the United Auto Workers (UAW) strike in 2023 also resulted in a slower-than-expected recovery.
While these could all be dismissed as temporary, the truth is that they all reflect a near-term spending bias among consumers. This type of behavior appears in weak markets. Let’s put it this way: If its customers see their sales increasing, they will rush to build inventory rather than reduce it.
In such a situation, it is advisable for investors in the industrial sector to remain cautious in the upcoming earnings season.
Image Source: Getty Images.
There is improvement in the second half
That said, this year was always going to be a story of recovery in the second half, hopefully driven by the low interest rate environment now that inflation is moderating. In fact, management maintained its full-year guidance for ADS growth of 0% to 5% in fiscal 2024. However, Gershwind acknowledged, “If you look at our framework for the back half of the year, certainly, it’s back-end loaded now. Looking at the way, starting slow, we came out of the gate “
In support of the argument that the business environment will improve in the second half of the fiscal year, Gershwind spoke of “confidence building among our customer base” due to the improved outlook for interest rates.
What does this mean for investors
Putting everything together, it’s clear that near-term decline in the industrials sector means that many industrial companies are quite likely to miss expectations in the coming quarter. In the case of MSC Industrial, given that it reported weak earnings in the first quarter, it makes sense for investors to lower their earnings expectations.
Reading about other industrial companies only meeting their fourth quarter guidance would be positive, and they may give wider ranges in their full year guidance to reflect uncertain growth conditions.
That said, the potential for a correction in the second half means investors should focus on initiating long-term positions by buying out any significant weakness in companies that look like good value heading into earnings. If MSC Industrial’s earnings are a guide there will be plenty of opportunities to do so in the coming weeks.
Should you invest $1,000 in MSC Industrial Direct now?
Before buying stock in MSC Industrial Direct, consider this:
Motley Fool Stock Advisor The analyst team has just identified what they believe 10 best stocks For investors to buy now… and MSC Industrial Direct was not one of them. The 10 stocks that made the cut could deliver tremendous returns in the coming years.
stock advisor Provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks every month. stock advisor The service has more than tripled the returns of the S&P 500 since 2002*.
View 10 Stocks
*Stock Advisor returns are as of January 8, 2024
Lee Samaha has no positions in any stocks mentioned. The Motley Fool has posts on MSC Industrial Direct and recommends it. The Motley Fool has a disclosure policy.
This Company Just Hinted Where the Industrial Economy Is Headed in 2024 Originally published by The Motley Fool