MSC Industrial Direct Co Inc (NYSE:MSM) stock rose 1.88% (As on June 18, 11:13:34 AM UTC-4, Source: Google Finance) after Loop Capital downgraded the company from Buy to Hold, adjusting the price target to $80 from the previous figure of $110. The decision follows a negative pre-announcement from the company, which has led to a reduction in earnings estimates below the consensus for fiscal year 2025.
Loop Capital cited several reasons for the downgrade, including ongoing cyclical headwinds and negative feedback from recent checks in the industrial distribution sector. Additionally, issues with MSC Industrial’s website and digital relaunch are expected to delay any significant outperformance until at least the second quarter of fiscal year 2025.
The firm’s analysis suggests that the anticipated positive re-rating of the stock after the removal of Class-B shares is no longer viable in the current environment of negative revisions and stagnant earnings growth. Loop Capital’s earnings forecast for both fiscal years 2024 and 2025 stands at $4.85 per share.
Despite the current pullback in shares, Loop Capital acknowledges potential upside risks, such as the possibility of activist investor involvement or a buyout offer. However, these factors are considered unpredictable and insufficient to justify maintaining a Buy rating.
The revised price target of $80 reflects a 16.5 times multiple on the forecasted earnings per share for fiscal years 2024 and 2025. This is compared to the 5-year median multiple of 14.8 times and the 10-year median of 16.8 times, with historical trough multiples nearing approximately 12 times.
Meanwhile, the company has announced softer than expected preliminary third quarter results and have lowered the full year 2024 outlook, primarily driven by two factors. First, while average daily sales improved sequentially, ongoing heavy manufacturing softness and a slower than anticipated ramp in the Core Customer resulted in a lower sequential revenue improvement than anticipated. Second, gross margins were approximately 60 basis points below the expectations primarily due to, in roughly equal proportion, increased product and customer mix headwinds and unexpected dilution from the web price realignment. The latter tracks back to complexities that were not uncovered during the pilot phase of the web price alignment and the time it took to identify the cause of the unexpected dilution. Net sales of approximately $978-$980 million down 7.3%-7.1% YoY and includes a roughly 300 basis point headwind from non-repeating Public Sector orders in the prior year