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Zacks Industry Outlook Highlights W.W. Grainger, SiteOne Landscape Supply, MSC Industrial Direct and ScanSource

·10 min read

For Immediate Release

Chicago, IL – June 22, 2022 – Today, Zacks Equity Research discusses W.W. Grainger, Inc. GWW, SiteOne Landscape Supply, Inc. SITE, MSC Industrial Direct Co., Inc. MSM and ScanSource, Inc. SCSC.

Industry: Industrial Services

Link: https://www.zacks.com/commentary/1941586/4-industrial-services-stocks-to-watch-in-a-prospering-industry

The Zacks Industrial Services industry is poised to benefit from the ongoing expansion in the manufacturing sector despite the prevailing supply chain disruptions and cost pressures. Pricing actions and cost-cutting measures undertaken by the industry players have been driving margins.

It is worth mentioning that the rise in e-commerce activities will act as a key catalyst for the industry. The industry players, including W.W. Grainger, Inc., SiteOne Landscape Supply, Inc., MSC Industrial Direct Co., Inc. and ScanSource, Inc., have been making efforts to capitalize on this trend.

About the Industry

The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities such as routine maintenance work, emergency maintenance and spare parts inventory control, which keep a facility and its equipment in good operating condition. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing.

The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers' core products or services. By offering inventory management, process and procurement solutions, these companies reduce MRO supply chain costs and improve customers' plant floor productivity.

What's Shaping the Future of Industrial Services Industry

Momentum in Manufacturing Activity: Around 70% of the industry's revenues are derived from sales in the manufacturing sector. Trends in customers' activity have historically correlated to changes in the Metalworking Business Index ("MBI") and the Industrial Production Index ("IP"). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focused on durable goods manufacturing.

The index has been above 50 lately, which indicates expansion. Backlog remains near historic highs. Per the Federal Reserve, manufacturing output has gained 4.8% over the past 12 months. In manufacturing, new orders, production and backlogs are growing at a rapid pace. The ongoing improvement in business sentiment and operational activity instills further optimism in the industrial services industry's prospects.

Supply Chain Issues and Cost Woes Persist:  The COVID-19 pandemic has impacted factory productivity and the supply chain. These supply chain and capacity challenges have led to higher transportation and labor costs due to the need to deliver finished goods to customers in a timely manner. Restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, in certain cases, have resulted in higher costs and delays, both for obtaining raw materials and components and shipping finished goods to customers.

The companies have been witnessing tight labor availability for some positions and incurring higher labor costs to meet the high levels of demand. COVID-19-related worker absenteeism also remains an issue. Inflationary cost pressures add to the woes. Meanwhile, the industry players have been focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and diversification of supplier base to mitigate some of these headwinds.

E-Commerce Acting as a Key Catalyst: MRO demand has been significantly impacted by the evolution of e-commerce. Customers' demand for highly tailored solutions with real-time access to information and rapid delivery of products is on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online.

The pandemic led to a significant push in e-commerce activities. In 2020, over two billion people purchased goods or services online, recording e-retail sales above $4.2 trillion. In 2021, global retail e-commerce sales amounted to approximately $4.9 trillion. This is expected to go up 50% over the next four years and attain a level of around $7.4 trillion dollars by 2025. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.

Zacks Industry Rank Indicates Bright Prospects

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, which is a 23-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #48, which places it at the top 19% of 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors can keep an eye on, it's worth taking a look at the industry's stock-market performance and valuation picture.

Industry Versus S&P 500 & Sector

The Industrial Services industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has fallen 53.8% compared with the sector's decline of 24.4%. The Zacks S&P 500 composite has slumped 14% in the same time frame.

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 21.40x compared with the S&P 500's 10.84x and the Industrial Products sector's forward 12-month EV/EBITDA of 13.36x.

Over the last five years, the industry has traded as high as 35.77x and as low as 8.30x, with the median being at 11.87x.

4 Industrial Services Stocks to Keep an Eye On

Grainger: The company is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. GWW has been witnessing strong growth in non-pandemic product sales as the U.S. economy recovered. The company's product mix is stabilizing as customers return to more normal operations.

Grainger is thus investing in non-pandemic product inventory and partnering with suppliers to mitigate supply-related challenges, inbound lead time challenges and any possible cost increases. Investments in e-commerce and digital capabilities will yield results. Increased e-commerce sales and strong demand for non-pandemic products will continue to drive the top line. Cost control measures undertaken by the company will sustain margins.

Lake Forest, IL-based Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services. This company currently has a Zacks Rank #2 (Buy) and an estimated long-term earnings growth rate of 13%. The Zacks Consensus Estimate for 2022 earnings has moved up 7% in the past 60 days. The consensus mark indicates year-over-year growth of 32.5%. GWW currently has a trailing four-quarter earnings surprise of 4.35%, on average.

SiteOne Landscape Supply: The company has been benefiting from robust demand as customers continue to invest in their outdoor living spaces. In addition to organic growth, it has been enhancing its business through acquisitions to increase its customer base, broaden product lines and expand its geographic reach.

SITE acquired eight new high-performing companies in 2021, followed by three buyouts (JK Enterprise Landscape Supply, BellStone Masonry Supply and Preferred Seed) so far this year. The company will gain from its focus on cost reduction, driving operational excellence, product category management, enhancing supply chain efficiency and strengthening pricing. The company has been investing more in sophisticated information technology systems and data analytics.

Roswell, GA-based SiteOne Landscape is a national wholesale distributor of landscape supplies. It currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company's earnings for fiscal 2022 indicates year-over-year growth of 9.8%. The estimate has moved up 5% in the past 60 days. The company has a trailing four-quarter earnings surprise of 129.9%, on average.

MSC Industrial Direct Co.: The company has been committed to acquiring new companies to expand its product offering. It recently acquired Engman-Taylor, which will strengthen its metalworking business. MSM has been awarded a five-year contract to service 10 U.S. Marine corps bases across the Continental United States, Hawaii and Japan, which will fuel revenues in the remaining part of fiscal 2022 and fiscal 2023.

It continues to invest in technology and expand its e-commerce channel, which generates around 60% of its revenues. The company is improving its margin and operating leverage through Mission Critical productivity initiatives. It continues to expect $25 million in cost savings in fiscal 2022 and at least $100 million in total cost savings by the end of fiscal 2023.

Melville, NY-based MSC Industrial distributes metalworking and maintenance, repair, and operations products and services in the United States, Canada, Mexico, and the U.K. The Zacks Consensus Estimate for MSM's 2022 earnings has been revised upward by 6% in the past 60 days. The consensus mark indicates year-over-year growth of 26%. The company has a trailing four-quarter earnings surprise of 3.2%, on average. It currently carries a Zacks Rank #3.

ScanSource: The company's leadership position in large, niche markets along with sustained growth from innovative technology offerings across hardware, software, connectivity and cloud provide it with a competitive edge. The Specialty Technology Solutions segment has been benefiting from strong market demand, increases in big deals and market share gains.

Digital acceleration and technology refresh initiatives with end-users are driving demand for the company's channel partners. The Modern Communications & Cloud segment is gaining on the shift to cloud and subscriptions. The company has immense growth potential in both its segments. Its cost-control efforts will bolster margins. Its strategy to grow through acquisitions and alliances and enhance technology offerings and service capabilities is commendable.

The Zacks Consensus Estimate for the ScanSource's 2022 earnings has been revised upward by 15% in the past 60 days. The consensus mark indicates year-over-year growth of 46%. The Greenville, SC-based company, which distributes technology products and solutions, has a trailing four-quarter earnings surprise of 38.9%, on average. The company currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today's Zacks #1 Rank stocks here.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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