Last week, Fastenal (FAST) reported weak organic sales for the quarter, and shares have floated down from their May high of $50 to around $42 today. There was brief hope that the dismal industrial environment that escalated in the second half of 2015 would create "easy comps" for the second half of this year -- and a brisk organic growth recovery would unfold. That is not happening.
Yesterday, W. W. Grainger (GWW) reported results that were uncharacteristically underwhelming. Earnings missed consensus by $0.28, or almost 10%. Organic sales dropped, as the energy complex in North America took a bite out of Canadian sales. Margins compressed on light pricing and some share shifts. Overall, earnings are down 12% on the previous year. Shares are down almost 15% from this year's high. Grainger lowered guidance -- on lack of support for a second half recovery in the markets -- and the stock went down.
Every couple of years, it seems that Grainger takes that "one step back" in the "two steps" needed to move the company forward. Over time, great strides have been made.
Shares have become more attractive recently -- but not enough to get me excited. Perhaps another 10% more downside would prompt the initiation of a position in GWW.
Genuine Parts (GPC) , a distributor of auto parts, industrial, office and electrical supplies, similarly reported lackadaisical results. The company reduced organic sales guidance in its industrial and electrical markets -- obviously seeing the same paltry demand backdrop. I'm always looking for an entry point in this dynamic name.
Overall, customers across the U.S. industrial landscape, including aftermarket energy component manufacturers, fasteners and auto parts -- the nuts and bolts of our economy -- are in the midst of an inventory adjustment to right size stock of parts for this slow environment. The strong dollar has put something of a lid on our export sales lately, but we do see the underpinnings of a continued slow churn in demand in our domestic markets.
Indeed, companies like Halliburton (HAL) this morning called a "turn" in the North American rig markets. This could be decent news for the energy-exposed industrial supply chain -- if only to cast some logical light onto the brisk cyclicality of some of these submarkets of our economy. Watch for the print in more-cyclic distributors of slightly lower quality -- like MRC Global (MRC) or NOW Inc (DNOW) .
Companies like Grainger, Fastenal and Genuine Parts remain the best of breed. Cash conversion, strong domestic footprints, fast logistics, sound cash flow and good working capital management make them special. We are watching for a turn to get more excited about them -- and that time is getting closer.