Slightly Down is the New Up

The Industrial Supply Association Conference & Trade Fair took place earlier this week. I moderated a panel session, The View from Wall Street on Industrial Markets, with Walter Liptak, security analyst for Barrington Research Associates, Chicago, IL, and Holden Lewis, Industrial Equipment Analyst for BB&T Capital Markets Equity Research, Richmond, VA. They gave the industry insiders in that room (standing room only) a view from the investment side on strengths, weaknesses and trends.
Sometimes the truth hurts, and their analysis of a range of macro trends, end-use markets and outlook for the near-term was not pretty. That said, some of the data gave a glimmer of hope on top of the recent positive signs that we could near the bottom of this cycle and see a stronger second half of 2009. Their insights into the publicly traded industrial manufacturers and distributors were valuable to all in the room. Example: In discussing the investment merits of distributors, Lewis noted that profits are up slightly in spite of strong raw material inflation, and companies are generally more efficient and better managed going into this downturn. Balance sheets are more flexible and cash flows are healthy.
That was the overall mood at this conference. The economy is what it is. Many manufacturers and distributors are down hard in certain markets, in some cases 30 percent or more. But some are down slightly, and feeling pretty good about it. I also had a few conversations with distributors and manufacturers who are up this year because of their customer base (i.e. medical devices or certain aerospace).
Just as the stock market has seemed to react to "less bad news" by rallying, there was a sense of rallying at this ISA event. Attendance was down, as is the case at all association events this year, but there was strong attendance at the educational and business sessions. People were focused on how to position this year.
And as customers are reevaluating their supply relationships, distributors and manufacturers are much more open to trying new things, experiment and look at new relationships. The mood this week, which I did not sense a month ago, is that people are starting to see the upside to this unprecedented volatility that has been so stressful the past several months. In spite of the tough conditions, there was an energy you could sense in this group that speaks to the power of our economic system - and particularly to the people in that building and in this wholesale distribution industry - to innovate and regenerate by finding new ways to create value. This week was a needed reminder."