INDUSTRIAL DISTRIBUTION: MORE POSITIVE SIGNALS ON THE HORIZON
Industrial Distribution’s Curt Tatham turns to housing statistics and durable goods orders to study the improving economy. He says, “Economic news continues to improve, but distributors’ valuation multiples remain static.”
Industrial Distribution Excerpt:
The severity and length of the current “great recession” may at times make you feel as though we will never emerge from this period of severe economic challenges. However, like all economic downturns that have come before, this one will eventually appear in our collective rearview mirror. Indeed, increasingly we are seeing economic indicators display encouraging signs that the rate of economic contraction is slowing and that stabilization is approaching—or perhaps is upon us already in certain sectors. Recent encouraging data include:
Housing starts rose at an annual rate of 17 percent in May
Housing purchases have begun to pick up in certain areas of the country
Durable-goods orders in May posted a better-than-expected 1.8 percent increase (the third increase in the past four months for durable-goods orders)
A narrower gauge of business investment marked its largest improvement in more than four years
The Institute for Supply Management’s Purchasing Managers Index rose to 42.8 percent in May from 40.1 percent in April, above the 42 percent expected by economists—the highest reading since September and well above the 28-year low of 32.9 percent in December.
A key ISM sub-index, new orders, moved above 50 percent in May for the first time since November 2007, a sign that some parts of the manufacturing sector are beginning to recover.
Credit markets have stabilized, as reflected in the decline of the LIBOR (London Interbank Offer Rate) to .60 percent from a high of 4.82 percent in October while the Ted spread (an indicator of perceived credit risk in the general economy) fell to an 11-month low of .48 percent in May.
Following a two-day meeting in June, the Fed’s Federal Open Market Committee said on June 24, “Information received since the FOMC met in April suggests that the pace of economic contraction is slowing, financial market conditions are improving and businesses are getting a better grasp on how much inventory is needed for the sales rate.”
Distributors have been hoping for signs that customer destocking had reached bottom relative to the level required to meet shipment demand. However, while the Fed seems to feel that the structural adjustment to inventory levels resulting from the recession has progressed meaningfully, a closer look at the data is not as comforting. The May inventory-to-shipment ratio rose to 1.90 from 1.89, indicating that manufacturers’ inventories are actually getting further out of line despite massive efforts to reduce production and rationalize inventories. Meanwhile, in a recent Boston Consulting Group Study titled “Collateral Damage,” the inventory-to-sales ratio actually remains higher today at 1.45 than the long-term average of approximately 1.25.