Morningstar senior equity analyst Kwame Webb said in a ratings update published on Oct. 18 that the fair value estimate for the U.S-listed firm dipped to $80 a share from $82 after third quarter earnings that showed a sales decline of 2% year-on-year to $728 million, even as operating income rose 1% to $106 million.

Discussing the operating environment, management said customers are becoming incrementally cautious, announcing plant shutdowns, initiating furloughs, and reducing their order activity," Webb said.

"The softer environment spurred management to predict fourth quarter average daily sales will decline 5% year over year relative to the third quarter's 4% decline. Given these headwinds, we have reduced our sales growth rates for the remainder of fiscal 2016 and 2017."

MSC aids selling for nearly 3,000 suppliers covering 325,000 customers, according to Morningstar and "differentiates itself by competing on deep metalworking expertise, quick product delivery, and automated inventory stocking and ordering solutions for customers."

Webb added that "these solutions make the purchasing process completely automated, so customers waste little time refilling orders. This emphasis on IT investment has raised website and electronic portal sales to greater than 50% of overall corporate sales."

But Webb cautioned there may be a distant threat to the model as suppliers consolidate in the face of headwinds and competition grows from a small, but growing, trend of buying groups.

"If suppliers consolidate, that would increase disintermediation risk," Webb said.

"A related phenomenon is the buying consortiums that some private equity firms have assembled among their portfolio companies. We believe these buying consortiums are relatively rare and we would note that because the companies ultimately have to leave their PE sponsor's portfolio, they have to return to independent distributors. There is an ongoing consolidation trend among customers and suppliers, but we do not view it as rapid enough to create a negative moat trend."

APMEN Business News, Oct 2016