Most preferred stocks in industrial distribution and building products - Baird

Baird analysts ranked the most preferred industrial distribution and building products stocks in a recent analysis.

Performance across the industrial distribution group has been negative so far this earnings season. Companies such as MSC Industrial Direct Co. (NYSE:MSM) and Fastenal Co. (NASDAQ:FAST) have missed their consensus estimates and are trading slightly lower on their reports.

“Margins have surprised to the upside but weak sales have more than offset,” Baird analysts said.

Also, year-to-date performance among the group’s stocks is mixed. Building products are slightly outperforming an average of 0.9% vs. the S&P 500 (SP500), as of April 18, but industrial distributors have underperformed and average of -4.5%, driven by MSC Industrial Direct (MSM) and WESCO International (WCC), while Applied Industrial Technologies Inc. (AIT), Fastenal (FAST), W.W. Grainger Inc. (GWW) have outperformed.

When it comes to valuations, valuation multiples are mostly up year-to-date. Relative valuation, however, is still at or below historical medians for most of the group. Exceptions include Fastenal (FAST), W.W. Grainger (GWW), Core & Main Inc. (CNM), and Ferguson plc. (FERG).

“We do not believe the bar for investors’ expectations is set high this quarter,” analysts said. “March weakness should be well known/appreciated on the industrial side of the list, with this evident in both our Distribution Survey and Fastenal (FAST) and MSC Industrial Direct (MSM) March daily sales, likely de-risking expectations somewhat on the print for Applied Industrial Technologies (AIT), W.W. Grainger (GWW), and WESCO International (WCC).”

In addition, Baird analysts said they muted expectations for March on the building products group, given well-below consensus single-family starts data, feedback from their survey, and weather (higher precipitation year-over-year in many key Sunbelt states).

Performance, analysts said, will likely be “idiosyncratic and dictated by company-specific execution down the [profit and loss statements] in a challenging top-line environment.”

Nonetheless, fundamentals are expected to inflect positively in the second half of the year based on better outlooks in the quarterly survey, guidance across most public distributors, potential Fed rate cuts, and the March PMI and typical lag vs. activity data.

“Cyclically, we remain bullish as the distributors have historically outperformed coming off cyclical downturns,” analysts said.

Analysts ranked stocks in order of preference across the industrial distributors: MSC Industrial Direct Co. Inc. (MSM), Applied Industrial Technologies Inc. (AIT), WESCO International Inc. (WCC), W.W. Grainger Inc. (GWW), and Fastenal Co. (FAST).

And across the building products distributors: Beacon Roofing Supply Inc. (BECN), Core & Main Inc. (CNM), SiteOne Landscape Supply Inc. (SITE), GMS Inc. (GMS), Ferguson plc (FERG), Watsco Inc. (WSO), Hillman Solutions Corp. (HLMN), Builders FirstSource Inc. (BLDR), and Pool Corp. (POOL).