MSC Industrial Supply (MSM - Get Report) , a specialist in metalworking and maintenance, will report first-quarter fiscal 2016 earnings results before the opening bell Wednesday. After what was seemingly a disastrous year in 2015, where its shares plummeted 30.74%, against a decline of 0.73% for the S&P 500 (SPX) index, investors want to know if MSC can rebound in 2016. But analysts' estimates don't suggest confidence.
For the quarter that ended November, consensus earnings-per-share estimate calls for 87 cents a share on revenue of $708.73 million, translating to declines of 8% and 3%, respectively. For the full year, ending August 2016, earnings are projected to decline 4% to $3.64 a share, while revenue of $2.89 billion implies a decline of 0.6%.
Headquartered in Melville, N.Y., MSC Industrial distributes an array of industrial products, including measuring instruments, tooling components, cutting tools and fasteners. As evidenced by the trend in both quarterly and fiscal-year projections, revenue and profits have been hard to come by, thanks to the decline in U.S. manufacturing.
And plummeting oil prices, which adversely impacted some of MSC's large customers, fueled its struggles even more in terms of monthly sales, which have turned negative. At the same time, the company's operating expenses have ticked higher, climbing some 10 basis points in the fiscal fourth quarter. That's not a good combination, especially since operating margins have worsened, falling some five percentage points to 13%, from a record high of around 18%.
All told, it would seem some of MSC's most important metrics are heading in the wrong directions. Accordingly, it's tough to bet on these shares recovering anytime soon, especially with some 70% of MSC's revenue coming from the manufacturing industry, which isn't projected to immediately rebound in 2016.
By contrast, competitors like Grainger (GWW - Get Report) , which appears to be a safer play, generates just 30% of its sales from the manufacturing industry. So, while MSM stock may seem like a good buy based on fiscal 2016 estimates of $4.06, implying 11.5% earnings growth, much of those earnings are predicated on a rebound in manufacturing. That's not a bet I'm willing to make today.
And here's the thing: Assuming U.S. manufacturing does rebound in 2016, MSC -- having missed Wall Street's earnings targets twice in the past four quarters -- hasn't shown that it has the type of pricing power to deliver the level of earnings growth that would make its stock a worthwhile bet today. Competition has proved too difficult. And until management addresses its profit margin struggles, investors should avoid these shares, which have become cheap for a reason.