There’s no denying the slowdown in U.S. manufacturing now.
Fastenal Co., a distributor of factory odds and ends, reported second-quarter results that disappointed on almost every level, even in a market that was primed for disappointments. Earnings per share missed analysts’ estimates; it was the biggest quarterly gross margin shortfall in more than five years; and daily sales growth for the quarter was the weakest since the first period in 2017. Analysts had hoped that a slower April was just a temporary blip, and they were encouraged in that thinking by a rebound in Fastenal’s May sales data. It now appears the downward trend is more permanent and marked.
Fastenal is often considered a harbinger of things to come for the larger multi-industrial companies it counts as customers. That perception has been challenged by some of the company’s more idiosyncratic circumstances, such as its investments in a network of vending machines and on-site inventory management services as it adapts to Amazon.com Inc.’s foray into industrial distribution. But while the growth benefits of that business-model reinvention (and the irksome margin shrinkage that comes along with it) were present in Fastenal’s second-quarter results, what stood out the most were good old-fashioned macroeconomic headwinds of the kind we’ve been seeing in recent data.
The Institute for Supply Management’s gauge of new U.S. factory orders fell to 50 in June, the lowest since December 2015 and a level that indicates zero growth. The JPMorgan Global Manufacturing Purchasing Managers Index fell to 49.4 in June, the second straight month of contraction. The implications for earnings aren’t heartening. While the first quarter was heavy on mixed-bag numbers for industrial companies as a whole – with ongoing strength in the aerospace industry but acute struggles in anything related to the automotive and electronics sectors – the upcoming batch of second-quarter results is likely to be more uniform, and not in a way investors are going to like. Even the aerospace sector is looking less robust – or at least less worthy of inflated valuations – after a downshift in passenger traffic growth.
Fastenal’s weak results echo similarly lackluster numbers from fellow distributor MSC Industrial Direct Co. on Wednesday. Sales missed analysts’ estimates for MSC’s fiscal third-quarter, with Chief Executive Officer Erik Gershwind calling out a “step-down” in demand since April and an uncertain pricing environment “due to the overhang of tariffs and trade.”
Distributors like Fastenal and MSC have historically been skilled at passing on price increases to their customers, but both Fastenal and MSC appear to be struggling to overcome both the impact of tit-for-tat tariffs in the U.S.-China trade war and the typical cost inflation that comes later in the economic cycle. Fastenal noted that it raised its prices at the end of 2018 and early 2019, but that wasn’t enough. The company is taking additional actions to counter broader cost pressures and the increased tariffs slapped on $200 billion of China-sourced products by President Donald Trump in May. With little real clarity on the trade tensions, the question is whether the demand is strong enough to support yet another round of price increases. The numbers released by Fastenal and MSC this week would seem to suggest otherwise.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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