Weakness Continued Through September
Our latest US distributor survey sees a profound downside bias to 3Q expectations, given deterioration in September.
Remain cautious on GWW and expensive short cycle names, such as ITW, 3M and ROK.
The major question we hear is whether the rash of pre-announcements that hit last week, most notably from Honeywell, is company-specific or sector-generic?
Our 20th Annual Alphawise US Distributor Survey suggests that there is broad risk to 3Q expectations, given, by far, the greatest downside skew vs. expectations in our survey history, capped off by an unusually weak September. While
distributors are more bullish on forward acceleration, noting election uncertainty, it is clear that inventory headwinds will remain a factor and that weak pricing power will continue to put pressure on distributor gross margins, especially as Amazon is clearly gaining market presence. This keeps us cautious on GWW, since it is in the cross hairs of many of this issues, as well as expensive short cycle "peak-margin" names (ITW, 3M, ROK).
The key findings in more detail are as follows:
* We continue to see a negative bias to growth expectations, similar to trends seen in our six most recent surveys, which predated weaker than expected organic growth results. This quarter, Agriculture Equipment, General Industrial and Defense witnessed the most upside relative to distributor expectations, while Home Building was the only industry that reported positive upside versus previous expectations.
* September appears to have tracked below seasonal norms, with an average 0.9% decline M/M. On the end market level, distributors of Oil & Gas and Agriculture Equipment were the weakest M/M, down 5% and 3% in
September, respectively. Conversely, Automotive, Healthcare and Home Building distributors were stronger in September, all up >1% from August.
* Given the upcoming election, political uncertainties were noted as an overhang on sales, with 48% of respondents pointed to the political environment as a headwind in 3Q. By end market, distributors in the Agriculture Equipment, Defense and Healthcare witnessed the most significant impacts from political uncertainties.
* 2016 growth expectations deteriorated sequentially to -0.3% Y/Y vs. +1.0% in 2Q16.
9 out of 17 end markets forecast volume growth in 2016, with the most bullish expectations in Home Building, Healthcare and Automotive. Meanwhile, O&G, Ag Equipment and General Industrial are expected to be most depressed end markets.