Distribution stocks on the rebound
By Jeffrey Germanotta -- Industrial Distribution, 1/1/2000
After a dismal 1999, distribution stocks began to bounce back toward the end of the year. Since our last report, 15 of the 22 distribution stocks we monitor posted positive stock price appreciation, with several experiencing double-digit improvement.SunSource gained 55 percent, climbing to $6.19, following its announcement to acquire Axxess. Premier Farnell's stock appreciated 37 percent, to $14, with the company recently reporting improving trends in most U.K. and U.S. business units. Vallen's stock soared 26 percent to $24.89, reflecting the tender offer by Hagemeyer N.V. And, MSC Industrial was up 23 percent ($10.94), indicative of sequential monthly improvements in customer service and sales growth. Questron's stock price also rose 30 percent to $6.75.
Through December 16, the ID/Baird Index as a whole has gained just over 11 percent since late October.
Near term, we anticipate generally moderate improvements in sales growth rates for this group of stocks, as we are encouraged by several positive trends among the macroeconomic statistics we track (like the NAPM Index, new manufacturers orders and industrial production). Additionally, we feel the Fed has adjusted interest rates sufficiently to control inflation, which, when combined with improving economic trends in Asia and Europe and a relatively weaker U.S. dollar, should stimulate export activity. However, profits may continue to be under pressure from several factors including: commodity price deflation; significant incremental spending on information, telecommunications and electronic commerce initiatives; higher interest rates; increased fuel prices; a tight labor market influencing wages and turnover; and customer benefits related to inventory reduction. Additionally, temporarily lower valuations should slow merger activity and opportunities to raise public equity capital.
Long term, the distributors most likely to be rewarded with the highest earnings multiples will demonstrate an ability to overcome the previously mentioned cost pressures with other productivity improvements, while embracing new business models and technologies (Internet) to gain market share by providing customers with better service, more efficient procurement techniques, and lower inventory carrying costs.
Jeffrey Germanotta is senior vice president of equity research at R.W. Baird & Co. He can be reached at 414-765-3572, or e-mailed at jgermanotta@rwbaird.com
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