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business news3 Industrial Company Earnings Reports Worth Noting
By
Mark Majka
Oct 19, 2011 11:20 am
The September earnings reports of W.W. Grainger, Fastenal, and Parker Hannifin were strong, and the companies are worth checking out.
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For September quarter earnings, there have been a few strong industrial company reports that are worth noting.
W.W. Grainger (GWW) is an industrial distributor with 81% of revenues from U.S. and 12% from Canada so it's a heavily North America-biased name. I always follow the distributors because they are the window into the broader economy. GWW reported a very solid September quarter and raised its CY11 guidance from prior $8.40 to $8.70 to $8.80 to $9.00 (excluding special items). On the midpoints, that is a raise of 4%. The stock had a strong day yesterday. Under the hood, there was no notable deceleration in YoY sales trends with daily sales growth for July, August, and September all at 10% excluding acquisitions. In the U.S., the YoY daily sales trends were 5% July, 8% August, and 7% Sept. In terms of key end markets, GWW reported the following YoY growth trends: Heavy Manufacturing was up in the mid teens; Commercial was up in the low double digits; Light Manufacturing and Retail were up in the high single digits; Contractors and Government were up in the mid single digits. Operating margins are expected to increase 175 bps YoY, so they have been able to raise prices well above commodity input costs. I would note that GWW could be (to my knowledge) the only publicly traded company that does not hold a Q&A session after earnings so no additional flavor to add.
Fastenal (FAST) reported last week. FAST is a retail store-based industrial and construction distributor. It has a bit more non US exposure than GWW. Here are key comments from CEO from their call:
For the third quarter, we were a little lower than the first two quarters, but we're still above the sequential trend -- our historical sequential trends. We're very optimistic about that. Our Manufacturing customers, as we stated, grew at 18.3% as compared to 18.5% in the second quarter and 15.5% in the first quarter. So there has not been a lot of change, but if anything, it's remained strong. So we're very optimistic about that. Non-Resi construction grew at 15.8%, the same as the second quarter, and that's an area that there isn't a tremendous amount of activity. Most of that's coming in energy jobs and larger construction jobs in infrastructure, but you don't see much as you drive around in these tower cranes and things like that. So overall, the sales trends are good, and we remain optimistic in somewhat of an uncertain time. We don't have a tremendous amount of visibility, but the anecdotal stuff that we're getting from our people in the field is still quite positive, although there are a few signs of things slowing a little bit. But for the most part, it's very positive.
My comment: In the Q&A the slowing part was flushed out to be large consumer product companies. There was no notable change in September sales trends. Despite the decline in ISM to 50ish, CEO said manufacturing remains solid.
Parker-Hannifin (PH) had a a strong September quarter and raised its fiscal year (June) guidance from prior midpoint of $7.10 to $7.55 or a 6% increase. PH is a big supplier into the distributor channel and noted that general industrial, heavy duty truck, ag, and construction were all strong end markets with refrigeration flat and semis negative. PH was up a strong 6% yesterday on the news. PH is a global industrial, but relative to other bellwether names it still has more US exposure. I would note that PH usually puts out conservative initial FY guidance but it is already raising it only one quarter into the new fiscal year. And given the degree of anxiety over the economy in the summer, that is notable.
CEO key comments from the call:
Europe is still doing fine. Asia, as you know, is trending down and we anticipated that last quarter. But again, when we talk about Asia going down in China in particular, we're talking about from a 12% GDP down to maybe a 9% or 10% GDP. And we'll see how long that sustains. Typically, what we've see over there has been a short-lived thing and typically activity picks up again. But even at 9% or 10%, we're happy with those kind of numbers and we can deal with that. But I would say, right now, Europe looks very good for us. All of the major countries there, being Germany, France, U.K., Italy, are all looking good. So we're not as concerned about the smaller countries. Of course, we want to see strength across the board but the major ones are all doing very well and remain strong for us. So that's reason we're pretty optimistic about Europe going forward. In spite of the fact that, of course, everybody's been reading the newspapers and I just make one other comment, if we haven't tucked ourselves into a double dip by now, we probably won't because we've been talking about it for a better part of two quarters here. And Europe with the Greece problem and the debt problem hanging over us and the $14 trillion debt in United States, if we haven't talked ourselves into it, I don't think it's probably going to happen anytime soon. So having said that, that's the reason we're kind of bullish going forward through the balance of our fiscal year.
So, it appears that the industrial economy, which has been the steady growth driver for U.S. GDP since 2009, is still not seeing any meaningful slowdown through September.
The Industrials sector only had one meaningful negative pre-announcement for the third quarter with investor relations and they have heavy residential- and non-residential construction exposure, a notable weak area of the economy. For now, what we have seen in some of the broader-based industrials with US bias is that the demand environment is not as bad as the stock price declines suggest. Of course, the consumer side of the economy is 70% of GDP and the data points there are not as positive.
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