MSC Industrial (MSM)

Industrial supplies company MSC Industrial Direct (NYSE:MSM) met Wall Street’s revenue expectations in Q2 CY2025, but sales were flat year on year at $971.1 million. Its non-GAAP profit of $1.08 per share was 5.1% above analysts’ consensus estimates.

Company Overview

Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE:MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Competitors in the industrial products and services industry include W.W. Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and Applied Industrial Technologies (NYSE:AIT).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, MSC Industrial’s sales grew at a sluggish 2.6% compounded annual growth rate over the last five years. This fell short of our benchmarks and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. MSC Industrial’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 3.2% annually. MSC Industrial isn’t alone in its struggles as the Maintenance and Repair Distributors industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, MSC Industrial’s $971.1 million of revenue was flat year on year and in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.1% over the next 12 months. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

MSC Industrial’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 41.6% gross margin over the last five years. Said differently, roughly $41.63 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

MSC Industrial produced a 41% gross profit margin in Q2, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

MSC Industrial’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 10.6% over the last five years. This profitability was solid for an industrials business and shows it’s an efficient company that manages its expenses well. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, MSC Industrial’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, MSC Industrial generated an operating margin profit margin of 8.5%, down 2.4 percentage points year on year. Since MSC Industrial’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for MSC Industrial, its EPS declined by 5.6% annually over the last five years while its revenue grew by 2.6%. However, its operating margin didn’t change during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For MSC Industrial, its two-year annual EPS declines of 24.4% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q2, MSC Industrial reported EPS at $1.08, down from $1.33 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 5.1%. Over the next 12 months, Wall Street expects MSC Industrial’s full-year EPS of $3.69 to grow 2.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

MSC Industrial has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.9% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that MSC Industrial’s margin dropped by 1.6 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

MSC Industrial’s free cash flow clocked in at $75.98 million in Q2, equivalent to a 7.8% margin. The company’s cash profitability regressed as it was 3.8 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although MSC Industrial hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.7%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Uneventfully, MSC Industrial’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

MSC Industrial reported $71.69 million of cash and $576 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $407.6 million of EBITDA over the last 12 months, we view MSC Industrial’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $12.57 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see MSC Industrial beat analysts’ EBITDA and EPS expectations this quarter despite in line revenue. In the quarter, management saw "encouraging data points, such as core customer sequential improvement, continued momentum in our high-touch solutions and a building productivity pipeline." Overall, this print had some key positives. The stock traded up 4.7% to $88.95 immediately after reporting.

Updated: July 10, 2025 at 11:11 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in MSC Industrial.

MSC Industrial falls short of our quality standards. To kick things off, its revenue growth was weak over the last five years, and analysts don’t see anything changing over the next 12 months. And while its admirable gross margins indicate the mission-critical nature of its offerings, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its organic revenue declined.

MSC Industrial’s P/E ratio based on the next 12 months is 24.1x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $89.86 on the company (compared to the current share price of $91.66).