On Thursday, Wolfe Research began coverage on MSC Industrial (NYSE:MSM) shares, assigning them an Outperform rating. Analyst highlighted the company's position as the largest distributor in the metalworking niche, a notably fragmented market.
According to InvestingPro data, MSC Industrial maintains a strong financial health score of GOOD, with liquid assets exceeding short-term obligations. Cooke noted that MSC Industrial's transition to a high-touch model is expected to foster growth.
Cooke praised MSC Industrial's gross margin, which stands at over 40%, as best-in-class. He pointed out that there is a significant opportunity for the company to improve productivity compared to its peers and to reduce selling, general and administrative (SG&A) expenses, which are currently in the low-30% range, versus the mid-20% for competitors like Fastenal (NASDAQ:FAST) and W.W. Grainger (NYSE:GWW).
The report also mentioned that MSC Industrial's high fixed cost structure, coupled with ongoing productivity initiatives, should lead to strong incremental earnings of around 25% once the company returns to mid-single-digit growth in the fiscal year 2026. This projection is more optimistic than the Street's current expectation of sub-20% incrementals.
Wolfe Research anticipates a sales growth acceleration for MSC Industrial, with key lead indicators such as the ISM Index, industrial production, and durable goods orders pointing to a return to growth by the end of fiscal year 2025. In the medium term, the analyst expects a higher mix of In-Plant facilities to contribute to stronger and more sustainable growth.
Concluding his analysis, Cooke stated that although the consensus estimates for MSC Industrial's earnings recovery had been adjusted downward, the market consensus might be overly punitive. The company currently trades at a P/E ratio of 19.28 and offers an attractive dividend yield of 4.25%, having maintained dividend payments for 23 consecutive years.
According to InvestingPro Fair Value analysis, the stock appears slightly undervalued at current levels. Wolfe Research's projection of stronger incremental margins positions their outlook well above the Street's forecasts, and they find MSC Industrial's valuation attractive when compared to the extended multiples of Fastenal and W.W. Grainger. For deeper insights into MSC Industrial's valuation metrics and growth potential, investors can access the comprehensive Pro Research Report available on InvestingPro.
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