FAST reported 2.6% daily sales growth in July. Fasteners (-7.5%) and Other Products (-3.6%) remained in negative territory, but continued to improve vs. June. Safety shipments moderated meaningfully M/M to +38% (vs. +94.9% in June). We were more bearish than consensus that was closer to 5-6%. The major gating factor vs. our model was Safety, where growth decayed rapidly to +38% vs. 55% WRe. Yes, consistent with 2Q commentary, but contrary to the directionality of that market (viz. MMM, HON, GWW guidance) and underlines our concerns around ADS volatility through 2H.
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The Safety surge is clearly a positive and demonstrates exemplary execution at a time of customer stress. However, the >20c surge benefit for this year (~15c in 2Q) creates quite a hole to fill – an emerging issue as the street starts finetuning FY21e. The risk is more volatile monthly sales trends over the next 12 months, and sluggish FY21 EPS growth relative. Our YE20 target price remains unchanged at $40.
FAST reported $0.42 EPS vs. $0.39/0.36 WRe/Street and a buy-side-bogey of ~$0.40. Sales were 1c favorable with the remainder coming from strong SG&A leverage and a favorable tax rate vs. WRe. Free cash flow of $210m was well ahead of $116m WRe, but mostly due to cash tax benefits that are likely stimulus-related. Overall, a strong quarter. See Ex 1-2 for more detail.
MSM is a negative lead into FAST sales as Safety PPE and Janitorial surge sales are decaying much quicker, core June demand is not accelerating and potential structural actions do not support a sharp V-recovery. We now expect flat June ADS, but remain 2c ahead of consensus. Gross margin headwinds and volatile 2H sales outlook are key reasons why we remain UP at these rich multiples.
The outlook for a Democrat clean sweep has moved closer towards a base case scenario. This is our first crack at reading the runes on potential tax, trade, climate, infrastructure and defense policy, and the impact for US industrials. Who do we judge as winners and losers? It is too early to tell, but see Ex 5-6 for how we balance perceived opportunities and challenges by stock. Clearly very early days, and we welcome feedback, as always.
Global Industrials Trader #22: The data are supporting the positive momentum that is priced into stocks, and we think the puck is now moving towards the possibility/probability of peak EPS recapture in 2021. We are modestly ahead on 2Q20e that is looming ahead, but it really is all about the shape of 2H recovery. Critical to sentiment will be how management teams frame the back half, and whether cost containment measures will continue to hold.
This week we recap on 1H performance and implications for 2H in light of the KPI’s on which we exit the half year. We also review latest construction spending data with implications for the HVAC industry. Finally, we sign off ahead of 4th July with a fun fact on ROK. We hope you get to enjoy a relaxing long weekend with your loved ones.
Our Cap Goods Momentum Index improved from 34.5 to 40.8, driven by all regions, with notable strength continuing in China. But even weaker regions (US, Europe) are showing strong expansion for the single month of June. What is clear is that this is a very different downturn to 2009 – we did not reach the momentum lows and it has bounced much harder off its lows – and perhaps bears a closer parallel to 1958 as we highlighted in WIW #637 on 27 March. While stocks are clearly ahead of the curve (See Ex 17 for CGMI vs. Stock Performance), we highlight that revenue expectations are now almost certainly too bearish for 2Q20 and/or 3Q20.
It is fair to say that this is a glass half full survey with growth accelerating through the quarter for many end markets (Food/Beverage, Fire/Security, Truck, HVAC, General Industrial), but continues to lag in many longer cycle industries. Commercial Construction is a major sector debate, but remains a relative safe harbor for now. However, respondents see a demand pocket that will be difficult to fill once the current backlog of projects roll-off. The good news is that pricing power is firm, price/cost margin pressures are stable and there is no evidence of deteriorating competitive pressures. We remain well ahead of consensus for GWW and continue to see multiple expansion for HDS as it prepares to relaunch the White Cap spin. T&D (HUBB), F&S (JCI, CARR), HVAC and Home Building (SWK) are end markets where distributors are more confident on the growth outlook.
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