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Stock Strategist Industry Reports

Industrial Distributors--The Strong Get Stronger

Distributors are posting strong earnings, but few bargains exist for investors.

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After navigating the rough waters of 2008 and 2009, industrial distributors are harnessing their competitive strengths to chart a course of higher revenue and earnings. However, we find few bargains in this sector, and most stocks in our coverage list are trading near our fair value estimates.

All Is Well with Industrial Manufacturing
Industrial distributors are broadly exposed to the manufacturing output of the United States. The strength in U.S. manufacturing is measured by the ISM Manufacturing Index, with a score above 50 signifying expansion. After contracting for the 14 consecutive months beginning in June 2008, this metric finally turned positive in August 2009. The latest ISM manufacturing index came in 56.9, indicating that U.S. manufacturing is likely to continue to expand, benefiting all distributors. Even distributors with exposure to currently weak sectors like construction have started to enjoy rising revenue. For example,  Fastenal (FAST) derives 20%-25% of its sales from nonresidential construction, and during the four quarters of 2009 revenue from this segment declined 6.4%, 19.6%, 25.3%, and 24.8% year over year, respectively. In 2010, nonresidential sales declined 14.7% in the first quarter before improving 0.5% in the second and 6.3% in the third quarter. We expect these upward trends to continue in the short to medium term, boosting the top line at Fastenal and at its competitors.

Anil Daka does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.