On Monday, MSC Industrial (NYSE:MSM) experienced a change in stock rating as Loop Capital shifted its stance 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.
In other recent news, MSC Industrial has faced several significant developments. The company's fiscal third-quarter results and a reduced guidance led KeyBanc to downgrade the company's stock from Overweight to Sector Weight.
The analyst at KeyBanc expressed concerns over ongoing challenges in the heavy manufacturing and metalworking sectors, which are expected to impact the market until 2025. Furthermore, MSC Industrial's management is dealing with execution issues within its core customer initiatives, causing a lack of confidence in the company's ability to recover its out-year margins.
MSC Industrial also announced the resignation of its Senior Vice President & Chief Digital Information Officer, John Hill, following a separation agreement that includes a severance package and acceleration of restricted stock unit awards. In terms of financial performance, the company reported mixed results for its fiscal second quarter of 2024, with underwhelming revenue growth in its core customer base. Despite this, the company anticipates improved revenue trends in the latter half of fiscal 2024 and into 2025.
Baird has adjusted its outlook on the company, reducing the price target to $84 from the previous $95 while maintaining a neutral rating. This revision follows the company's pre-announcement of third-quarter fiscal year 2024 results, which fell short of expectations.
InvestingPro Insights
In light of MSC Industrial's recent challenges and stock rating changes, InvestingPro data reveals a nuanced picture of the company's financial health. With a P/E ratio of 13.69, slightly below the historical median, the market is pricing MSM at a relatively modest earnings multiple. This could suggest that the stock is undervalued, especially when considering the company's solid dividend yield of 4.38%, which is a testament to its commitment to returning value to shareholders. Additionally, the company's management has been actively buying back shares, which is often viewed as a sign of confidence in the firm's prospects and a contributor to high shareholder yield.
However, recent performance indicates that the stock has faced significant pressure, trading near its 52-week low and experiencing a one-month price total return of -16.8%. This aligns with Loop Capital's observations of cyclical headwinds and the negative pre-announcement impacting earnings estimates. On a brighter note, the company's liquid assets exceed its short-term obligations, and its cash flows can sufficiently cover interest payments, reflecting a degree of financial resilience.
For those interested in a deeper analysis, InvestingPro offers additional insights and metrics. There are currently 13 more InvestingPro Tips available for MSC Industrial, which can be accessed through the platform. For readers looking to explore these in greater detail, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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