MSC Industrial (MSM)

Industrial supplies company MSC Industrial Direct (NYSE:MSM) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 2.7% year on year to $978.2 million. Its non-GAAP profit of $1.09 per share was 6.3% 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 is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, MSC Industrial grew its sales at a sluggish 3.4% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. 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% annually.

This quarter, MSC Industrial reported modest year-on-year revenue growth of 2.7% but beat Wall Street’s estimates by 1.5%.

Looking ahead, sell-side analysts expect revenue to grow 4% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

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. That means MSC Industrial only paid its suppliers $58.44 for every $100 in revenue.

MSC Industrial produced a 40.4% gross profit margin in Q3, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, MSC Industrial’s operating margin decreased by 1.3 percentage points 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.

In Q3, MSC Industrial generated an operating margin profit margin of 8.6%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 4.4% annually over the last five years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of MSC Industrial’s earnings can give us a better understanding of its performance. As we mentioned earlier, MSC Industrial’s operating margin was flat this quarter but declined by 1.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

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 22.9% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q3, MSC Industrial reported adjusted EPS of $1.09, up from $1.03 in the same quarter last year. This print beat analysts’ estimates by 6.3%. Over the next 12 months, Wall Street expects MSC Industrial’s full-year EPS of $3.75 to grow 10.2%.

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 8.2% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that MSC Industrial’s margin expanded by 1.1 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

MSC Industrial’s free cash flow clocked in at $58.53 million in Q3, equivalent to a 6% margin. The company’s cash profitability regressed as it was 2.5 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

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 16.1%, 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. Over the last few years, MSC Industrial’s ROIC averaged 4.2 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

MSC Industrial reported $56.23 million of cash and $538.8 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 $403.5 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 $11.85 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 good to see MSC Industrial narrowly top analysts’ revenue expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 2.3% to $89 immediately after reporting.

Updated: December 3, 2025 at 10:37 PM EST

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 doesn’t pass our quality test. First off, its revenue growth was weak over the last five years. 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 20.1x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $87.50 on the company (compared to the current share price of $82.82).