Distribution stocks take a hit
Although some investors have abandoned distribution stocks, others say it might be time to buy
By John R Johnson -- Industrial Distribution, 10/1/1998
Newton, Mass.--Will the August swoon be followed by a fall boom? That remains to be seen for distribution stocks, which got hammered along with the rest of the stock market in August. Many distribution stocks traded at new 52-week lows at the end of August due to uncertain financial concerns in Asia and Russia, and fears of a slowing economy in the U.S.Of the 14 publicly traded distribution firms that ID tracks, only one - Vallen Corp. - managed a gain over the June-July-August time period. All others lost market value. Seven lost 20 percent or more off their stock price.
Two big losers were recent IPOs/rollups Pentacon and Industrial Distribution Group. Pentacon went public at $10 a share in March and dropped to 8 by the end of August. IDG, which went public 13 months ago at $17 a share, had dropped to 117/16 by Sept. 1. It fell further, to $5.25 a share, in early September before rebounding.
However, IDG chairman Marty Pinson says no fundamentals have changed with his company, which took a 20 percent loss in one day alone on Sept. 4 when a major investor sold off a 300,000-share block of stock. Pinson feels that investors may be shaken by fears that the economy may tank sometime soon.
Also, JLK Direct Distribution has missed recent earnings estimates, and "that has caused all of us concern because we're all cast with the same pall when that happens," says Pinson. "There's also a general feeling of a slowing in the pace of manufacturing in this country, which directly would impact our growth rates."
Further, some in the industry question whether the whole consolidation plan will work. IDG was formed in September 1997 with the rollup of nine independent distributorships. It has since added 12 distributors to the fold.
"The bloom is off the rose for rollups or consolidation stories," says Pinson. "There is enormous concern that consolidations can't be successful, and we're hearing and seeing that concern affect us. Since the beginning of July, we've been hard hit like everybody, first with the correction ... but we've been hit [in early September] because there's been some larger shareholders selling stock."
Solidifying Pinson's claim about the investment community's fear of a slowdown were the actions of Schroders in New York, which recently downgraded Fastenal and MSC Industrial Supply. Analyst Barbara Gorden Cohen says her firm cut its ratings on Fastenal and MSC not because of company fundamentals, but because of the macro economic picture.
"[Distribution stocks] have been hit harder than the market as a whole," says Gordon Cohen. "That is not unusual given that most small caps got hit first before the Dow Jones, and that because most of them are small cap stocks."
However, she remains bullish on Pentacon, which announced plans to acquire ASI Aerospace Group, Inc. in August. ASI Aerospace Group, Inc. has annualized revenues of approximately $73 million, which would bring Pentacon's annualized run rate of revenues to nearly $300 million.
Cohen says that even good news hasn't helped small cap stocks during a rocky time on Wall Street.
"If you are investing and need to put cash somewhere and the market is going down, you won't be investing in these small cap stocks that have been public for six or 12 months," says Cohen. "You'll fly to quality, so to speak. It hurt people like [Pentacon and JLK], and it's also going to affect distributors that have high growth projections like MSC and Fastenal because it's difficult to believe 20 percent growth in an economy that's declining.''
However, Jeffrey Germanotta, vice president at Baird, says now might be the time to start looking at some beaten down distribution stocks. He notes that although the group has suffered losses, the industrial distribution sector has held up better than many of Baird's other distribution indices.
"I think it definitely is a buying opportunity," says Germanotta. "People should be looking very closely at these stocks now, and focusing on those with the best business models with the best management and a high maintenance repair mix of business and a low percentage of foreign sales."
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