Nov. 21 (Bloomberg) -- Sales at W.W. Grainger Inc. and Fastenal Co. are confirming recent reports of improvements in U.S. manufacturing.
These distributors supply products to construction, industrial and commercial customers, making them “excellent proxies” of economic activity, said Steven Roukis, managing director at Matrix Asset Advisors Inc. in New York. U.S. sales at Grainger, in Lake Forest, Illinois, rose 10 percent in October, the biggest increase since February 2012. Winona, Minnesota-based Fastenal’s daily net sales grew 5.3 percent last month at stores more than five years old, the fastest in eight months.
The companies’ results are useful for corroborating the pace of factory output -- or “inflection points” -- that signal production is starting to accelerate in what’s proven to be a “slow and steady” economy, Roukis said. Their monthly sales track shipments of durable goods, excluding transportation products, which rose a seasonally adjusted 3 percent in September from a year ago, the most since July 2012, according to Census Bureau data. October figures are scheduled to be released Nov. 27.
Parker Hannifin Corp., a maker of gears, pumps and valves, is another “great tell on general industrial-business activity” and helps inform investors about the pace of economic expansion, said Chris Bertelsen, who oversees more than $2 billion in assets as chief investment officer of Global Financial Private Capital in Sarasota, Florida.
Its North American industrial orders rose 3 percent in its fiscal first-quarter, the first increase in five quarters, the Cleveland-based company said Oct. 18. Census figures show U.S. orders for nondefense capital goods excluding aircraft and parts grew 8.7 percent in September from a year earlier, following the biggest rise in more than a year for August.
The company data suggest “trends are stabilizing and aren’t getting any worse,” said Brent Rakers, an analyst with Wunderlich Securities Inc. in Memphis, Tennessee. Sales growth for Grainger and Fastenal is starting to return to “normal sequential patterns,” while also getting a boost from some “positive momentum in demand” and is lapping easier comparisons from a year ago, he said.
Grainger forecast a range for 2014 earnings of $12.25 to $13.00 a share on Nov. 13, below the $13.22 consensus of analysts’ estimates compiled by Bloomberg. Rakers said this reflects “more of a margin concern” about the ability to raise prices than weakening demand.
He maintains buy recommendations on Grainger and Fastenal because he’s looking ahead to an economic recovery that could begin in the second half of next year and continue into 2015, he said. “These companies perform very well in a normalized environment,” when they’re able to boost prices.
U.S. gross domestic product will grow 2.6 percent in 2014 and 3 percent in 2015, up from 1.7 percent this year, according to the median forecasts of economists surveyed by Bloomberg.
Grainger and Fastenal also express some optimism.
“Sales growth to date for November is trending in line with October after normalizing for acquisitions in 2013 and the hurricane in 2012,” Casey Darby, senior manager of Grainger investor relations, said on a Nov. 12 conference call. Similarly, Fastenal’s “sales growth came in about where we thought it would be for the quarter” ended Sept. 30, Chief Executive Officer Will Oberton said on an Oct. 9 conference call.
As investors try to make sense of U.S. expansion that’s “better than a snail” though not yet robust, manufacturing is “certainly attractive” for investment, Bertelsen said. He’s held Parker Hannifin for two years, Fastenal is on his “buy list” now and he says Grainger could be in the future. “Owning stocks in this part of the industry is important for gauging the strength of the economy.”
Even so, production activity remains uneven. Recent sales advances -- particularly for Grainger -- could be driven more by market-share gains than a rebound in demand, Roukis said, adding that this could be misinterpreted as overall strength in the industry.
In addition, Fastenal experienced a “soft industrial market” in its most recent quarter, which hasn’t changed a lot, Oberton said on the call. “We don’t believe it’s getting any worse. We don’t see signs that it’s improving.”
While sales are climbing at both companies, they’re still “performing lower” than one of the benchmarks for the industry, Rakers said. The Institute for Supply Management’s manufacturing index rose to 56.4 in October, the highest since April 2011 and fifth consecutive month of increases. The boost has been driven partly by gains in light manufacturing, which isn’t as representative of Grainger’s and Fastenal’s customers, he said. November figures are scheduled to be released Dec. 2.
Other industry measures that better reflect their buyers -- who tend to make heavy-duty equipment -- are showing more modest increases, Rakers said. JPMorgan Chase & Co.’s global manufacturing purchasing-managers’ index rose to 52.1 in October from 51.8 the prior month and still is more than 5 points below a 2011 peak.
Even so, Roukis said he isn’t worried a slowdown is afoot unless Fastenal, Grainger and Parker Hannifin report a contraction in sales or broader output measures weaken. He tracks these companies’ sales growth -- even though he doesn’t currently hold them -- and recent gains suggest manufacturing activity is improving or is poised to do so, he said.
“If sales from these companies are negative, there’s definitely a pause or a downswing in the economy,” Roukis said. “If their numbers are getting better, you know things are easing or even accelerating.”
To contact the editor responsible for this story: Anthony Feld at firstname.lastname@example.org