Stocks plunged Wednesday as investors grew concerned over rising interest rates and hints of a pickup in inflation. The Dow Jones Industrial Average (^DJI 0.32%) and the S&P 500 (^GSPC 0.44%) both opened lower and declined through the session. The technology-heavy Nasdaq Composite (^IXIC 0.58%) lost 4.1%.
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All sectors of the market fell, with technology and energy stocks being hit the hardest. The Technology Select Sector SPDR ETF (XLK 0.98%) tumbled 4.9% and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP -0.40%) closed down 4.6%.
As for individual stocks, Fastenal (FAST 0.22%) fell despite reporting good third-quarter results, and TransDigm Group (TDG 0.40%) announced plans to acquire Esterline Technologies (ESL).
Fastenal beats expectations, but rising costs raise concerns
Industrial supply distributor Fastenal reported third-quarter results that beat analyst estimates, but shares fell 7.1% on concerns about falling gross margin. Revenue increased 13% to $1.28 billion, ahead of the analyst consensus estimate of $1.27 billion. Earnings per share increased 38.3% to $0.69, compared with the $0.67 Wall Street was expecting.
The increase in sales was due mostly to strength in underlying demand and success that Fastenal is having selling through vending machines on customer sites. The installed base of vending machines grew 14% and sales through the devices increased about 20%. Price increases to mitigate inflation also contributed to sales gains.
Gross margin was 48.1%, a full percentage point below the year-ago period and a decline of 60 basis points from last quarter. Falling gross margin has been a concern the past two quarters, and the company cited a shift in customer and product mix and rising freight costs as reasons for the trend.
Fastenal is being regarded as something of a bellwether for the earnings season, being one of the earliest industrial companies to report. The company reported good results reflecting a strong economy, but also flashed some warning signs on some issues the market is watching closely, saying, "[C]hallenges remain from inflationary pressures and new tariffs on Chinese-sourced goods."
TransDigm makes a big buy
Aerospace parts supplier TransDigm Group announced it is buying smaller competitor Esterline Technologies in a $4 billion, all-cash deal. Esterline stock rose 30% to $115.41 on the news and shares of TransDigm fell 3.2%.
TransDigm is paying $122.50 per share, which is a 38% premium to Esterline's share price at the close of trading on Oct. 9. The transaction will be financed through a combination of $2 billion in cash on hand and some new term loans. TransDigm had recently made moves to generate more cash in order to be prepared for acquisitions. The purchase has been approved by both boards and is expected to complete in the second half of 2019.
"Esterline's core aerospace and defense business consists of primarily proprietary, sole source products with significant and growing aftermarket exposure," said TransDigm CEO W. Nicholas Howley in the press release. "We view this as highly complementary to our existing business."
TransDigm has proven adept at buying up other parts suppliers in order to bolster its business supplying the commercial aircraft aftermarket parts market. This latest transaction is the 50th business that TransDigm has bought since its IPO in 2006. Esterline, with its estimated 2018 revenue of $2 billion, will be a significant addition to TransDigm's business, which analysts estimate will generate $3.8 billion in revenue this year.