U.S. industrial distribution demand is recovering and data centers are accelerating, but residential markets continue to weigh on growth

Overview

The report reviews the Q2:26 or corresponding fiscal-quarter results of seven U.S. industrial distributors: Ferguson, Fastenal, W.W. Grainger, Watsco, Wesco International, Core & Main, and MSC Industrial. Its central conclusion is that industrial conditions are improving and data centers and large capital projects have become the strongest sources of growth, but residential construction remains weak and overall industry valuations are near decade highs.

Core views

Three clear themes are emerging at the industry level. First, U.S. industrial demand continues to improve, with sales growth at Fastenal, Grainger, and MSC Industrial reaching 8%-15%, while company commentary has shifted from “early signs of recovery” at the beginning of the year to more explicit acceleration. Second, data centers have become a real and expanding growth driver, with Wesco and Ferguson's non-residential businesses growing 8%-13% and also generating indirect demand for Grainger and Fastenal. Third, residential construction continues to weigh on the industry, with Core & Main, Watsco, and Ferguson's residential business growing only 0%-2%. These end-market differences have also driven year-to-date stock performance: Wesco rose 48%, MSC Industrial 45%, Grainger 32%, and Fastenal 26%; Core & Main fell 15% and Watsco 10%; Ferguson, whose residential and non-residential businesses each account for roughly half of its operations, rose 9%. Except for Watsco, FY2026 consensus EPS estimates for the peer group have all been raised year to date. The degree of earnings outperformance was similarly divergent. Wesco delivered the strongest results this quarter, with revenue and profit exceeding expectations by 3.6% and 15.2%, respectively, and raised its guidance; its data center revenue reached US$1.5bn, up 45% year over year. MSC Industrial's revenue and profit beat expectations by 1.4% and 12.3%, respectively, while management described the industrial recovery as still being in the “third inning.” Excluding tariff refunds, Ferguson, Fastenal, and Grainger's revenue and profit beats were approximately 0%-2%. Watsco and Core & Main both missed profit expectations and also posted the weakest share-price reactions on their earnings dates. Pricing was positive across the industry, but as end-market demand improved, most of this quarter's upside was driven by volume. Meanwhile, the industry trades at approximately 16x EV/next-12-month adjusted EBITDA, well above its 10-year average of 13.5x, and also appears expensive relative to the S&P 500, increasing the importance of fundamental execution. Ferguson's Q2:26 results reflected solid core-business execution and improving end markets. Revenue of US$8.75bn and EPS of US$3.39 exceeded market expectations of US$8.58bn and US$3.32, respectively; total sales grew 4.6% and organic sales grew 3.8%, supported by low-single-digit price increases and modest volume growth. The residential business returned to 2% growth despite a difficult environment, with volume still negative but pricing positive; the non-residential business grew 8%, driven by large capital projects. Adjusted EBIT was US$932m, above the US$912m estimate. Gross margin was 31%, down 20bps year over year. Tariff refunds provided limited benefit because approximately 90% of sales are branded products for which suppliers bear import responsibility, while only the roughly 10% private-label mix benefited more directly. Large capital projects are Ferguson's primary growth engine and currently represent a mid-to-high-single-digit percentage of total company sales. Sales to Commercial/Mechanical customers grew 15% against a high comparison base, versus 20% growth in the prior-year period; sales to Industrial customers grew 18%, while backlogs and open orders increased across Commercial/Mechanical, Industrial, and Waterworks. HVAC growth accelerated from 1% in Q1:26 to 11%, with nearly half coming from acquisitions, also supported by the dual-trade expansion initiative and the acquisitions of Carrier Great Lakes and Dealers Supply Company. Bidding activity was strongest in data centers, followed by power generation and water infrastructure. Management noted that the cycle from bidding to revenue recognition is lengthy and revenue timing is difficult to predict, but the overall trend remains positive. Bernstein therefore believes large projects will continue contributing to growth over the next several years. Ferguson's non-residential growth had previously decelerated for four consecutive quarters, from 12% in Q3:25 to 10% in Q4:25 and 8% in both Q1:26 and Q2:26, at one point raising market concerns about the durability of data center growth. However, the new guidance implies renewed acceleration in H2:26, and Bernstein expects non-residential growth to exceed 10%. The company raised its FY2026 sales growth guidance from low-to-mid single digits to mid-single digits, narrowed and raised its adjusted operating margin range from 9.4%-9.8% to 9.5%-9.8%, and increased capital expenditure guidance from US$350m-US$400m to US$375m-US$425m. Based on stronger backlog and FY2027 momentum, Bernstein became more positive on Ferguson after this earnings season and maintained its Outperform rating and US$325 target price. Fastenal benefited from market-share gains and improving industrial end markets, reporting Q2:26 revenue of US$2.39bn, daily sales growth of 14.7%, and EPS of US$0.33; market expectations were US$2.34bn and US$0.33, respectively. Pricing growth slowed from 3.5% in Q1:26 to 2.9%, mainly because the company began lapping last year's price increases rather than because of weakening business trends; two-year stacked pricing remained 4.5%. Bernstein expects two-year stacked pricing to accelerate modestly to 5.5% in Q3:26, but this would still be at the low end of management's FY2026 cumulative price-increase target of 5%-8%. Fastenal's growth is increasingly concentrated among large strategic customers. Revenue from customers spending more than US$50k per month increased 26.2% year over year, while the number of large-customer locations grew 16.5%; the number of small-customer locations spending less than US$5k per month fell 10.9%, and related revenue declined 5.6%. The number of contract customers increased 7% year over year, indicating that growth came from both increased purchasing by existing large customers and new customer acquisition. Manufacturing accounts for approximately 75% of Fastenal's sales, and heavy manufacturing sales growth accelerated from 14.1% in Q1:26 to 18.1%; non-residential construction grew 17.0%, similar to 17.2% in the prior quarter; and other end markets accelerated from 11.3% to 14.1%. Fastenal's challenge lies in price-cost balance and its long-term gross margin. Management delayed the expected return to price-cost neutrality until early 2027 and, for the first time, explicitly stated that long-term gross margin typically declines by 50-60bps annually. The large-customer strategy helps deliver above-market sales growth but typically results in approximately 60bps of annual gross-margin compression. Bernstein therefore expects FY2026-FY2029 consensus gross-margin forecasts to be reduced. Although end-market demand is strong, a new CEO, new CFO, new strategy, and tariff pricing collectively create execution risk, while the valuation is near historical highs. The report sees very limited room for error and maintains its Underperform rating and US$42 target price. Grainger delivered healthy operating growth in Q2:26, with revenue of US$5.02bn and EPS of US$12.01, above market expectations of US$4.96bn and US$11.27, respectively; excluding the one-time IEEPA benefit, EPS beat expectations by only US$0.06. Daily organic constant-currency growth was 13.7%, above the 8.4% consensus estimate; total growth was 10.3%, above the 9.0% estimate. High-Touch volume and product mix contributed 7.4 percentage points, while price and customer mix contributed 4.3 percentage points; the segment's daily organic constant-currency growth was 11.7%, above the 9.6% estimate. Endless Assortment sales grew 13.5%, while daily organic constant-currency growth was 20.6%, partly driven by one-time advance purchases; Zoro grew 18.4%, and MonotaRO grew 24% in local currency. Grainger's gross margin was 39.5%, up 100bps year over year, exceeding the market's expectation for a 50bps expansion; operating margin was 16.1%, up 120bps year over year and above the 15.4% estimate. However, this quarter's margins benefited from IEEPA tariff refunds and a one-time gain from exiting the UK market; excluding these factors, underlying gross margin missed expectations. The MRO market has improved from several years of negative growth to low-single-digit positive growth. Data center-related project spending contributed 90bps to High-Touch growth year to date, with direct data center demand contributing approximately 1 percentage point to Q2:26 growth and indirect demand contributing more than 1 percentage point; together, they accounted for roughly one-third of volume growth. The company still expects FY2026 pricing above 4%, with September price increases contributing 40bps over the remainder of FY2026, equivalent to 100bps annualized. Grainger raised its FY2026 sales, EBIT margin, and EPS guidance for the second consecutive quarter. Its latest baseline is revenue of US$19.55bn, EPS of US$46.38, and an EBIT margin of 16.0%, versus market expectations of US$19.495bn, US$45.59, and 15.9%, respectively. Sales guidance increased by 70-80bps, EBIT margin by 20bps, and EPS by 1.7%. However, H2:26 still faces headwinds from low-margin projects and product mix, fuel, and freight, and the increase in gross-margin guidance was smaller than this quarter's outperformance. Bernstein believes growth is healthy but risk-reward is balanced and maintains its Market-Perform rating and US$1,250 target price. Among companies not formally covered, Watsco's residential demand stabilized, but Q2:26 profit came under significant pressure. Revenue rose 2% year over year, with same-store sales up 1%; revenue of US$2.104bn was slightly below the US$2.137bn estimate. Residential HVAC equipment grew 5%, with volume and pricing each contributing 2%, but commercial HVAC declined 8% because the A2L transition weakened VRF demand. Gross margin was 27.5%, down 180bps year over year and below the 28.4% estimate; EBIT margin was 11.3%, down 180bps year over year and below the 12.7% estimate; EPS was US$4.00, down 11.5% year over year and 10% below the US$4.44 consensus estimate. After HVAC volumes declined 17% in 2025, the industry has largely absorbed the pandemic-era pull-forward in replacement demand. Organic sales grew 4%-5% in July, but new construction activity remained weak on the West Coast and in the South, particularly in Florida and Texas. The company's medium- to long-term target remains to move gross margin toward 30%. Wesco delivered the strongest performance this quarter, driven by data center demand. Revenue rose 13% year over year, with organic growth of 12.6%, above the market's 8.4% estimate; pricing contributed 3 percentage points, with the remainder mainly coming from volume growth across all three segments. Data center revenue was US$1.5bn, up 45% year over year; CSS organic growth was 18%, with volume contributing 17 percentage points. Total backlog increased 60% to a record level, while CSS backlog rose 95%; EES organic growth was 11%, driven mainly by data center, construction, and industrial customers. Gross margin was 21.8%, up 70bps year over year; adjusted EBITDA margin was 7.3%, above the 6.7% estimate; EPS was US$4.57, up 35% year over year and 15% above expectations. The company raised its FY2026 outlook to revenue of US$26.1bn, an EBITDA margin of 7%, and EPS of US$16.75, and expects data center sales to grow 30%. Core & Main reported FQ1:26 revenue of US$1.91bn and EPS of US$0.72, above expectations of US$1.892bn and US$0.69, respectively; however, organic volume declined 1%, pricing was flat, and acquisitions contributed 1 percentage point. Gross margin was 27.2%, up 50bps year over year, driven by private-label products, procurement benefits, and pricing execution; adjusted EBITDA margin was 11.8%, 20bps above expectations. The municipal market, supported by state and local government infrastructure investment, remains the most stable end market, but residential demand showed no meaningful improvement, while weakness in commercial construction largely offset strength in data center and manufacturing projects. The company maintained FY2026 guidance for revenue of US$7.8bn-US$7.9bn, EBITDA of US$950m-US$980m, and operating cash flow equal to 60%-70% of EBITDA. MSC Industrial reported FQ3:26 revenue of US$1.05bn and EPS of US$1.43, above expectations of US$1.03bn and US$1.27. Daily sales increased 7.8% year over year, outperforming the industrial production index for the fourth consecutive quarter; pricing rose 7.2% year over year, above 6.6% in FQ2:26, while volume improved from a 4.4% decline in the previous quarter to 0.5% growth. Gross margin was 41.1%, up 10bps year over year, with positive price-cost contributing 20-30bps; adjusted EBIT margin was 10.6%, above the 10.1% estimate and up 160bps year over year, mainly supported by SG&A leverage and productivity initiatives. Overall, the report believes industrial distributors with long-term exposure to data centers, manufacturing, and other durable demand drivers, as well as healthy pricing, remain favored by the market in FY2026. However, high valuations make margins, project execution, and management delivery key differentiating factors. Among the companies formally covered by Bernstein, Ferguson is one of its preferred data center-related distributors. Grainger and Fastenal also benefit indirectly, but Grainger's second-half margin pressure and Fastenal's more structural gross-margin decline lead to neutral and negative views, respectively.

Analysis framework

The report first compares the seven companies by sales growth, degree of earnings outperformance, guidance changes, year-to-date share-price performance, and EPS revisions across three end markets: industrial, data centers, and residential. It then uses historical industry valuations to assess expectations already priced into the market. Next, it analyzes each company's pricing, volume, business mix, backlog, margins, and management guidance to assess the risk-reward profiles of Ferguson, Fastenal, and Grainger.

Methodology notes

• Industry/Sector Analysis FrameworkPrice-Volume Decomposition

  Decomposition of pricing and volume contributions

  The report decomposes sales growth into pricing, volume, and acquisition contributions to determine whether growth stems from genuine demand improvement, price pass-through, or inorganic expansion, and to explain differences in companies' margin outcomes.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Comparison of demand strength by end market

  The report separately examines industrial production, data centers, large capital projects, residential markets, and municipal infrastructure demand, using orders, project backlogs, and customer purchasing to assess the state of each end market.

• Valuation MethodEV/EBITDA valuation

  EV/next-12-month adjusted EBITDA

  The report compares the industry's current valuation of approximately 16x EV/next-12-month adjusted EBITDA with its 10-year average of 13.5x and historical level relative to the S&P 500 to illustrate sector valuation and room for error.

• Event-Driven Trading and Behavioral FinanceExpectation Gap/Expectations Management

  Results relative to consensus expectations and guidance changes

  The report compares revenue, EPS, and margins against market consensus expectations and combines the resulting beats or misses with guidance increases, reiterations, or implied slowdowns to assess the direction of post-earnings estimate revisions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Ferguson (FERG)

  Formally covered; data centers, large capital projects, and non-residential demand are driving growth, while the residential business remains a drag.

  Strengths

  Improving non-residential growth, backlog, and bidding activity, with higher FY2026 sales and margin guidance.

  Weaknesses

  Residential volume remains negative, gross margin declined 20bps year over year, and the timing of project revenue recognition is difficult to predict.

  Comparison

  Positioned between pure industrial or data center distributors and companies with residential exposure; Bernstein's view is more favorable than on Grainger and Fastenal.

  Risks

  Delays in large-project execution, persistent residential-market weakness, and margin improvement falling short of expectations.

• Fastenal (FAST)

  Formally covered; supported by improving manufacturing demand, market-share gains, and large-customer growth, but facing structural margin pressure.

  Strengths

  Daily sales grew 14.7%, while large-customer revenue and the number of contract customers both increased rapidly.

  Weaknesses

  Long-term gross margin is expected to decline 50-60bps annually, and the return to price-cost neutrality has been delayed until early 2027.

  Comparison

  End-market demand is strong, but the company faces more pronounced valuation and execution risks than Ferguson and Grainger.

  Risks

  A new CEO, new CFO, new strategy, tariff pricing, and high valuation collectively reduce room for error.

• W.W. Grainger (GWW)

  Formally covered; an improving MRO market and indirect data center exposure are driving organic growth.

  Strengths

  Daily organic constant-currency growth was 13.7%, and FY2026 guidance was raised for the second consecutive quarter.

  Weaknesses

  Excluding one-time tariff refunds and the gain from exiting the UK, underlying gross margin missed expectations.

  Comparison

  Operating growth is healthy, but H2:26 margin pressure makes the risk-reward less attractive than Ferguson's.

  Risks

  Low-margin project mix, fuel, and freight costs may continue to pressure gross margin.

• Watsco (WSO)

  Not formally covered; residential HVAC demand is stabilizing, but commercial HVAC and margins remain weak.

  Strengths

  Residential HVAC equipment volume returned to growth, and July organic sales increased 4%-5%.

  Weaknesses

  Q2:26 EBIT and EPS were both approximately 10% below expectations, while gross margin declined 180bps year over year.

  Comparison

  Compared with companies having greater data center and industrial exposure, its residential-related exposure has caused it to lag.

  Risks

  Weak residential new construction, the A2L transition, and a low-margin product mix may continue to exert pressure.

• Wesco International (WCC)

  Not formally covered; data centers are the most important growth driver and prompted the company to raise FY2026 guidance.

  Strengths

  Data center revenue grew 45%, total backlog increased 60%, and CSS backlog rose 95%.

  Weaknesses

  EPS partly benefited from a lower tax rate and the absence of preferred-stock dividends, while interest expense increased.

  Comparison

  It delivered the strongest results this earnings season and also led peers in year-to-date share-price performance.

  Risks

  Whether high data center growth and record backlog can convert into revenue as planned.

• Core & Main (CNM)

  Not formally covered; municipal infrastructure is relatively stable, but residential and commercial construction demand is weak.

  Strengths

  Gross margin, EBITDA margin, and EPS exceeded expectations, while the municipal business is supported by government infrastructure investment.

  Weaknesses

  Organic volume declined 1%, and FY2026 end-market volume is expected to be flat.

  Comparison

  Compared with companies exposed to industrial and data center markets, residential-related weakness has caused its year-to-date performance to lag.

  Risks

  A lack of residential-market improvement, cautious private construction activity, and weak commercial projects.

• MSC Industrial (MSM)

  Not formally covered; the industrial recovery and pricing drove sales, profit, and margins above expectations.

  Strengths

  Daily sales outperformed the industrial production index for the fourth consecutive quarter, volume turned positive, and SG&A leverage improved.

  Weaknesses

  Growth still depends mainly on 7.2% pricing, with volume contributing only 0.5%.

  Comparison

  Its results were second only to Wesco's this earnings season, and management believes the industrial recovery remains at an early stage.

  Risks

  If pricing slows without a sufficient volume recovery, growth and price-cost benefits may weaken.

Key data

• Industry Valuation16x EV/NTM adjusted EBITDANear a decade high, versus a 10-year average of 13.5x
• Wesco Data Center RevenueUS$1.5bnUp 45% year over year in Q2:26
• Ferguson Q2:26 Revenue and EPSUS$8.75bn / US$3.39Market expectations were US$8.58bn / US$3.32
• Ferguson Non-Residential Growth8% in Q2:26; estimated at 10%+ in H2:26The report expects renewed acceleration after consecutive deceleration
• Ferguson FY2026 Operating Margin Guidance9.5%-9.8%Previous guidance was 9.4%-9.8%
• Fastenal Daily Sales Growth14.7%Q2:26 revenue was US$2.39bn
• Fastenal Long-Term Gross Margin ChangeDecline of 50-60bps annuallyManagement said this trajectory is consistent with its large-customer strategy and historical performance
• Grainger Daily Organic Constant-Currency Growth13.7%Consensus expectation was 8.4%
• Grainger Q2:26 Gross Margin39.5%Up 100bps year over year, but included one-time IEEPA and UK exit benefits
• Watsco Q2:26 EPSUS$4.00Down 11.5% year over year and 10% below the US$4.44 consensus estimate
• Wesco BacklogTotal up 60%, CSS up 95%Total backlog reached a record level
• Core & Main FY2026 GuidanceRevenue US$7.8bn-US$7.9bn; EBITDA US$950m-US$980mOperating cash flow conversion target is 60%-70% of EBITDA
• MSC Industrial Daily Sales Growth7.8%Pricing increased 7.2% and volume grew 0.5%

Impact & implications

The report believes the industrial recovery and data center investment are expanding distributors' volumes and orders, but the benefits will diverge significantly based on end-market exposure, project execution, and price-cost management. Ferguson's improving non-residential business and backlog support a more positive view; Grainger's growth is strong, but underlying margins are under pressure; and although Fastenal is gaining large customers and market share, it faces more persistent gross-margin dilution. With sector valuations above historical averages, any margin or execution shortfall will create greater risk.

Risks

• The industry trades at approximately 16x EV/next-12-month adjusted EBITDA, near a decade high, leaving limited room for error if fundamentals fall short of expectations.
• Persistent weakness in residential construction may continue to weigh on Ferguson's residential business, Watsco, and Core & Main.
• Fastenal faces risks from management changes, strategic execution, tariff pricing, and downward revisions to FY2026-FY2029 gross-margin expectations.
• Grainger may continue to face headwinds in the second half from low-margin products and project mix, fuel, and freight costs.
• Large capital projects have lengthy cycles, creating uncertainty in timing between bidding, backlog, and revenue recognition.

What to watch

• Whether Ferguson's non-residential business can reaccelerate from 8% to above 10% in H2:26.
• Whether Ferguson's large-capital-project backlog and data center bids can continue converting into revenue.
• Whether Fastenal can restore price-cost neutrality in early 2027 and whether its annual gross-margin decline remains at 50-60bps.
• Whether acceleration in Grainger's MRO market can offset H2:26 product-mix, fuel, and freight pressures.
• The conversion progress of Wesco's total backlog, which grew 60%, and CSS backlog, which grew 95%.
• Whether Watsco's residential HVAC volume recovery and July organic growth of 4%-5% can continue.