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Fastenal Company (FAST), MSC Industrial Direct Co Inc (MSM): Why Are These Industrial Stocks So Weak?

Interestingly it highlighted the metalworking sector as a particular area of weakness. This is contrary to what Fastenal said, but my guess is that the latter has more exposure to aerospace and aviation. If we look at Alcoa Inc’s (NYSE:AA) recent results there was ongoing strength predicted for the aerospace industry, while the US automotive sector is forecast to grow at 0-4% this year. However, Alcoa did not raise its forecast for its US commercial building & construction despite more optimistic indications from new house builds and the Architectural Billings Index. Jam tomorrow?

What Is Going On?

It is hardly a clear picture, but what we do know is that the areas of relative strength in the economy are in things like autos, housing and aerospace. This is probably a function of how weak the first two industries have been in recent years.  In other words, comparisons are easier in these industries. Furthermore they are due to grow thanks to net household formulation and the age of the US care fleet. Aerospace’s strength is due to its global exposure and the recovery in profitability of the airlines.

Allegheny Technologies Incorporated (NYSE:ATI) is the sort of stock that will give good color on these themes. It recently outlined strong numbers from aerospace builds but weaker demand from the nuclear industry. In addition oil & gas demand was forecast to be lower thanks to inventory management actions by its customers. The story from Allegheny Technologies Incorporated (NYSE:ATI) is one of a mixed industrial outlook and it mirrors what Alcoa Inc’s (NYSE:AA) said recently.

Where Next?

Fastenal Company (NASDAQ:FAST) and MSC Industrial Direct Co Inc (NYSE:MSM) are companies with limited visibility so things can turn around pretty quickly for them. Furthermore, my hunch is that there is a willingness among industrial customers to hold off purchases whenever they see political uncertainty. Obviously long cycle industries like aerospace can’t really adjust demand levels in the short term. In other words, conditions can improve, and I suspect they will.

However my issue with buying either stock is that they are not cheap enough. Falling sales growth is never a good sign, and when I buy stocks like this I would expect to buy them with some excess negativity priced in. As I write, they trade on 34x and 19x current earnings respectively. I think that’s too much to pay for a cyclically aligned sector with little visibility and falling sales growth.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends MSC Industrial Direct Co Inc (NYSE:MSM) Industrial Direct. The Motley Fool owns shares of MSC Industrial Direct.

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