The Effect on Distributors as the
Economy Sputters Along
The stock market was humming along earlier this year, setting records on many days. Housing starts are climbing and indus- trial production is increasing, but beneath all that good news
there still is uncertainty in the industrial and construction sectors.
Let’s take the good news first: The housing market has bounced
back from its lows. The Commerce Department reported recently
that housing starts in February reached 917,000 homes at an annual rate, up 0.8 percent from a revised 910,000 pace in January
that was higher than initially estimated. Building permits increased
4. 6 percent to 946,000, the strongest number since June of 2008.
Single-family home construction increased to an annual rate
of 618,000, the most in 4 ½ years. But builder confidence in the
market for newly built, single-family homes paused for a third
consecutive month in March, with a two-point reduction to 44 on
the National Association of Home Builders/Wells Fargo Housing
Market Index (HMI).
“Following eight consecutive months of improvement, builder
confidence leveled off in January and has since edged down
several points,” noted NAHB Chairman Rick Judson, a home
builder from Charlotte, N.C. “Although many of our members
are reporting increased demand for new homes in their markets,
their enthusiasm is being tempered by frustrating bottlenecks
in the supply chain for developed lots along with rising costs for
building materials and labor. At the same time, problems with
appraisals and credit availability remain considerable obstacles to
Even if the housing market keeps recovering, it will take years
before it returns to the high levels of building and employment
before the recession hit.
Economic activity in the manufacturing sector expanded in
March for the fourth consecutive month but at a much slower rate,
according to the Institute for Supply Management (For more detail
on this report, see page 10).
And in the bad news scenario, Caterpillar is reporting a sharp
drop-off in sales through its worldwide dealer organization
and its stock is in negative territory as of late March. That is not
So What’s Wrong?
If you were to review comments made by several distributors
in the last quarter, you would find organic sales are flat to negative. Most growth came from acquisitions and at least one large
distributor is planning to consolidate facilities and institute layoffs
because of slow organic growth.
Airgas, one of the nation’s leading suppliers of industrial, medical, and specialty gases as well as welding and safety products, said
that its organic sales dropped in February and the company has
lowered its earnings per share guidance by four percent for the
4th quarter ending March 31.
“Organic sales growth in our Distribution segment has been
disappointing this quarter,” said Executive Chairman Peter McCausland earlier this year. “Although organic sales growth in
January was in-line with the low-single-digit growth assumption in
our fourth quarter guidance, organic sales growth for the month
of February was negative two percent. As a result, quarter-to-date
organic sales growth through February was flat compared to the
prior year and roughly two to three percent behind our guidance
assumptions, with the shortfalls being volume-related and in both
gases and hardgoods.
“Sales to-date in the month of March have not improved appreciably over February, and absent a strong finish in the next ten
days, these weaker-than-expected sales suggest that we may miss
the low end of our adjusted EPS guidance of $1.18 by approximately four percent,” McCausland continued.
Lack of Optimism Tempers Progress
Airgas is not alone in its thinking. Other distributors report that
buyers were purchasing products from hand to mouth.
In fact, almost every manufacturer and distributor that recently
reported earnings are basing much of their optimism on the latter
part of the year.
It’s almost as if distributors are holding their breath and hoping to wait out the slow economy until July — waiting for the
increased business. Only time will tell if they were right.
Some studies indicate optimism still exists on the economic
outlook, but no major study indicates overall confidence. Some