MSC Industrial (NYSE:MSM) reported a mixed set of results for its fourth quarter. Revenue came in better than analyst expectations, but in common with rival industrial supply company Fastenal, MSC Industrial is seeing ongoing margin pressures. Moreover, its guidance for the first quarter of fiscal 2015 was lighter than analyst expectations.
MSC Industrial meets earnings expectations, but guidance disappoints
A quick look at the highlights of its fourth-quarter earnings:
Fourth-quarter sales of $726.6 million versus internal guidance of $718 million-$730 million and analyst estimate of $724.8 million
Gross margin of 45.6% versus internal guidance of 45.7%-46.1%
Operating expenses of $231 million versus internal guidance of $230 million
Tax rate of 37.7% versus internal guidance of 36.7%
Adjusted non-generally accepted accounting principles EPS of $1.02 versus internal guidance of $0.98-$1.02 and analyst estimate of $1.01
Sales came in ahead of analyst estimates (and above the midrange of company guidance) and EPS topped internal guidance. So why was the stock marked down initially after the report?
There are three things to consider about these results, and investors should watch them closely, because the industrial equipment wholesale industry is always a useful bellwether of the economy.
First, gross margin came in below the internal guidance range. Moreover, guidance is for a sequential decline from 45.6% in the fourth quarter of 2014 to a range of 45.1%-45.5% in the first quarter of 2015. Essentially, the company is seeing a combination of what CEO Erik Gershwind called "the headwinds of the abnormally soft pricing environment" and CFO Jeff Kaczka referred to as "pressure on gross margin from mix" negatively impacting its margins.
Listening in on the earnings call, it's clear that management doesn't believe these are lasting effects, as the economy appears to be strengthening. Moreover, part of the reason for the weakness in margin from the product mix is because MSC Industrial has been winning business from national accounts, while smaller account revenue growth (which tends to be higher-margin) has lagged.
The second consideration is that the tax rate came in better than expected in the fourth quarter, which helped boost the EPS:
|Metric||Expected 37.7% Tax Rate||Actual 36.7% Tax Rate|
In other words, if the tax rate had come in as expected, then net income would have been $1 million lighter. The current weighted average number of shares, on a diluted basis, is 62 million, so the extra $1 million equates to almost $0.02 in EPS. Taking this out would have reduced EPS to $1 -- right in the middle of the company's guidance range, but below analysts' estimate.
Third, the guidance for the first quarter of 2015 is lighter than analyst estimates:
First-quarter revenue guidance of $727 million-$739 million versus analyst expectation of $732.4 million
First-quarter adjusted diluted EPS guidance of $0.95-$0.99 versus analyst expectation of $1.07
Overall, this was a mixed set of numbers from MSC Industrial. While revenue growth is doing fine, gross margin pressures are holding back earnings growth. In addition, the company benefited from a better than expected tax rate in the quarter, and earnings guidance is a bit lower than analyst expectations.