What Industrial Distributors Will Survive This Nightmarish Economy?
Times will be tough for small players.
The credit crisis dealt a serious blow to industrial distributors, who saw years of growth come to a skidding halt. Reduced core demand, lower customer inventory levels, and diminished acquisition activity shut down most growth avenues. To counter this slowdown, distributors are reducing working capital investment and have initiated cost-containment measures. We think well-capitalized, large distributors will beat this cyclical downturn, but smaller distributors with significant upcoming debt maturities are likely to flounder.
In the industrial distribution space, core demand is a function of the manufacturing output of the United States. This metric grew at a 5% annual pace from 2003 to 2008. However, this growth engine slowed abruptly as the credit crisis unfolded. In the last quarter of 2008, manufacturing output fell 9% (as charted below) from a year ago. The slowdown's pace accelerated during the first quarter of 2009, when manufacturing output fell 16%, 15%, and 17% in the months of January, February, and March. While the slowdown in manufacturing output is a sizable head wind to overcome, inventory reduction at the customers' end makes this the darkest hour for distributors in the past 50 years. Manufacturing firms reduced their inventory levels 0.3%, 2.2%, and 4.2% during January, February, and March of 2009, further adding to the misery of industrial distributors. Acquisitions are proving difficult to accomplish as weak credit markets and poor firm valuations are discouraging buyers and sellers alike.
Anil Daka does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.