Healthy global markets hit home

Distributors like Applied and Fastenal benefit from renewed economic strength in Asia and other nations

By -- Industrial Distribution, 6/1/2000

Vigorous sales and earnings for many U.S. distributors are signs of economic health both at home and across the globe.

As Asian nations shake off the flu that slowed down industrialized centers like Hong Kong, Japan and Singapore during the past few years, many distributors reported an earnings bounce during the last quarter. Manufacturers increasingly operate and sell on a global scale, and when foreign economies pick up, they require a quick infusion of products and components from their suppliers.

During the Asian economic and financial crisis, exports declined sharply and prices for commodities such as pulp, paper and metals bottomed out, said Holden Lewis, an equity analyst at CIBC World Markets Corp. in Washington, D.C. Even though very few distributors have a global presence, Holden explained, they're affected by the international activities of their customers. An overseas slowdown in sales of Caterpillar Inc. agricultural equipment and construction, mining and logging machinery, for example, could hit a one-branch distributor supplying a local Caterpillar plant.

"As production ramps up, manufacturers use a lot of MRO products," Lewis said. "That is having a favorable impact for these distribution companies."

Applied Industrial Technologies provides an example of how international markets affect the major distributors. The Cleveland, Ohio-based company reported record sales of more than $413 million for its fiscal 2000 third quarter, which ended March 31. The net change was nearly seven percent more than the same quarter last year. At the same time, earnings per share rose 33 percent-from 30 to 40 cents-for the distributor of power transmission, fluid power, and engineered products and systems.

Bill Purser, Applied's chief marketing officer, said the company is benefiting from improvements in the forest products, high-technology machinery, food processing and automotive industries.

"Those industries were impacted by the Asian flu, a good portion of their markets are domestic versus international," Purser said. "As the global markets, particularly the Asian and Latin American markets, have improved, imports have increased and they're running their manufacturing facilities at higher capacities."

Purser also emphasizes that Applied was positioned to take full advantage of the recovery after reorganizing its marketing department about two years ago from a product focus to an industry focus. The change allows Applied to respond to the nuances in each industry and market particular products more effectively, Purser said.

In an April statement, Applied Chairman John Dannemiller noted that the company achieved record quarterly sales levels primarily because of increased demand from key customers in those targeted industries. Dannemiller also said Applied expects recent strength in these industries to continue into 2001.

National manufacturing capacity utilization of more than 80 percent is a key measure of success for companies in the industry, Lewis said. The overall 1999 rate of 79.8 percent marked a recession for the industrial sector, he explained, but strong gross domestic product and overall production numbers did not reflect this weakness. So far this year, capacity utilization is above 80 percent, resulting in plenty of black ink for distributors in the first quarter.

"The majority of distributors have trounced expectations in that period," Lewis said. "We believe these trends will continue, as will earnings momentum for the remainder of the year."

Fastenal Co. is another success story. Earnings per share grew 29 percent, from 41 to 53 cents. Net sales for the Winona, Minn., firm's first quarter were nearly $176.3 million, an increase of 25 percent over last year.

Half of Fastenal's business is generated from the manufacturing sector, according to Steve Slaggie, the company's secretary. Fastenal benefited from a recent uptick in Asian demand for American-made products, Slaggie said.

Slaggie also pointed out that recent stock price gains reflect investors' recent "flight to value." Fastenal has grown at a compound annual growth rate of about 30 percent for the past 10 years with compound yearly earnings growth of about 20 percent each year since the 1987 IPO, Slaggie said, adding that investors finally began to recognize its true worth during this spring's NASDAQ fluctuations. The stock closed at $66.06 on May 8, a 47 percent gain over the December 31, 1999 price.

"When you can bid a dot-com company to stratospheric levels when the cash burn rate is unbelievable, [investors] all kind of pinched themselves a month or two ago and said we've got to diversify," Slaggie said. "They saw us and anybody in the industrial sector as having some solid value."

Investors may be sloughing off shares of dot-com companies, but customers have confidence in bricks and clicks products such as Applied's Applied ACCESSre-commerce vehicle. In April, the company announced that sales through electronic channels including EDI and the AppliedACCESSrsite are now at an annual run rate of more than $100 million. In a recent release, Applied's CEO David Pugh said the company is gratified by customer acceptance of the site, which was launched in July 1999.

Purser said Applied sees the electronic channel growth as a vote of confidence by customers that the company is making it easy for them to conduct B2B transactions. To help those small and mid-sized customers make the transition, Applied launched a Maintenance America paper catalog in January and a future e-catalog will use the same format, Purser said.

"Our first path was large customers but that's quickly changing," Purser said. "We're opening it up more to potential customers by allowing them to use credit cards."

Also on the list of recent winners is fastener distributor Questron Technology, Inc. of Boca Raton, Fla. Questron reported an 89 percent sales jump to almost $36.5 million compared to the same quarter last year.