The 2020 Mid-Year Economic Update_long

Analysis: 1Q Revenues Softer than Expected for Fastenal, MSC & Others

But management teams show cautious optimism.
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From a high level, first-quarter 2013 earnings were a disappointment for Fastenal, MSC Industrial Supply and electrical distributor Wesco International, according to Ryan Merkel, analyst for William Blair. On the other hand, W.W. Grainger exceeded expectations and raised the low end of 2013 guidance.

Merkel attributed the soft results to poor weather, the impact of the sequester, Easter timing and customer destocking, particularly in machinery. The distributors also saw broad-based weakness in metalworking, capital goods, federal government and nonresidential construction cited as some of the softer markets.

That said, most of the distributors reported consistent sales growth trends, with January starting soft, improvement in the second half of January and into mid-February, with a slowdown in March, Merkel said. Canada was stronger than the U.S. but is starting to slow down for Wesco and Grainger, particularly, after a torrid pace the last few years. Generally, management teams concluded that businesses are holding back decisions to invest new capital and visibility for improvement is low.

An interesting note to this past quarter’s results is that Fastenal and MSC reported the recent Institute for Supply Management Purchasing Managers Index results were not indicative of the health of the real industrial economy. Fastenal and MSC’s results were worst than past growth trends in a low-50s ISM environment. Removing the impact of industrial vending, which added 3-6 percentage points of growth for the companies, the decoupling looks worse, Merkel said.

One reason for the difference this year may be because of poor weather this year and great weather last, he said, making distributors’ growth rates look worse than they would otherwise. Government uncertainty could also be having a bigger impact on customer demand than the ISM suggests.

The distributors were cautious in their outlook for 2013, particularly Fastenal and MSC. Grainger and Wesco were more optimistic, Merkel said, expecting that the first-quarter impacts on sales were temporary.

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