Distributors look for a brighter year
Distribution stocks were hammered last year, but things should improve in 2000
By John R. Johnson -- Industrial Distribution, 2/1/2000
Newton, Mass.--Last year was not a good one for many publicly traded distributors. Of the 22 distribution stocks that INDUSTRIAL DISTRIBUTION tracks, 12 saw their stock price decline in 1999. Even worse is that nearly one half -- 10 firms -- lost at least 25 percent or more of their value in 1999.On the year, the ID/Baird Index lost 8.1 percent. By contrast, the Dow Jones Industrial Average gained just over 25 percent, and the tech-laden NASDAQ was up 85.5 percent.
The distribution culprit? A slumping manufacturing economy certainly played a role, along with increasing interest rates, commodity price deflation, and increased technology expenses to cope with the Y2K bug as well as Internet initiatives.
The biggest decliner was SunSource, which ran up against a host of problems, including the reorganization of its sales force, and slumped 77 percent. The stock traded at just under $6 at press time after reaching a low of $3.44 earlier last year. The hands-down winner was Premier Farnell, which rocketed 177 percent from a low of just under $5 per share to a year-end price of $13.88.
Premier vice president Bill Evanson says a fair amount of uncertainty surrounded the stock dating back two years, when Howard Poulson resigned from the firm and was replaced by John Hirst as CEO.
"In early 1999 we announced plans to get sales growth going in an upward direction and to get the businesses to do a lot more synergistic things that should have been done in 1997," said Evanson. "As John gave that message, the investment community looked at the company a little closer. The proof [lies in] delivery, and our third quarter had a 10 percent overall growth in sales which the investment community took as we are starting to do what we said we would."
The other big gainer on the year was Questron Technology, which shot up 43 percent. The only other distributor up more than 20 percent was Vallen Corp., which owed most of its 23.1 percent stock price gain to the buyout offer it received from Hagemeyer N.V. in December.
W.W. Grainger, which gained 14 percent on the year, started out on a down note in 2000, despite being one of 89 companies named to Goldman, Sachs & Co.'s list of favorite stocks for the year 2000. However, just three days after the list was published, Grainger announced that its fourth quarter earnings could be as much as 45 percent lower than the current Wall Street estimate of 54 cents per share.
Grainger was expected to report its fourth quarter and year-end results late last month. The firm says the results reflect a negative fourth quarter adjustment to inventory, which is related to the installation of a new enterprise resource planning system. In addition, the company experienced higher operating expenses in the quarter.
"We have taken the necessary steps to correct the problems and have completed the rollout of the new system to our 370 branches and six zone distribution centers," Richard L. Keyser, Grainger's chairman and chief executive officer, said in a release. "Despite the challenges experienced during 1999, we are pleased with the strong sales growth in December, particularly on-line sales which had an annualized run rate of more than $200 million. We will continue to aggressively invest in our Internet initiatives to extend our leadership position."
However, at least one industry analyst questioned whether Grainger would be able to overcome its problems so quickly. Andrew Jeffrey, an analyst with Robertson Stephens in San Francisco, thinks the announcement might just be the start of more bad news from Grainger.
"This is the most misleading event I have ever encountered with just about any company," said Stevens, who expects the industrial sector as a whole will see margins eroded as more business-to-business e-commerce companies increase efficiencies in the industrial segment. "This is just the first manifestation of that. The company's explanations and guidance are incredulous at this point."
Another analyst, R.W. Baird's Jeff Germanotta, wasn't surprised that Grainger warned about earnings, but didn't expect the news to be so bad. "We knew the inventory adjustment was a potential risk, and we always know when a company is undertaking significant technology investments that there is a risk," he said. "We weren't surprised by the event, but by the magnitude of the issue."
However, by press time Grainger's stock had rebounded to trade at $54.25, just shy of its 52-week high.
As for 2000, Germanotta expects earnings growth to be in the mid-teens for many of the stocks in the ID/Baird index. "We think the Fed is using rates effectively to control inflation, international markets are coming back, and with some third quarter earnings releases we saw early evidence that demand is picking up for many manufacturers that these distributors serve," he said.
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