The two big questions stock investors have right now is how deep will the economic contraction be in the second quarter, and what will the shape of the recovery be like in future quarters? While those answers won't be definitively decided by any data being released in May, investors can still get very useful information on trends and also see which sectors might come back stronger than others.
In this context, multi-industry industrial 3M (MMM +2.66%), heavy equipment machinery company Caterpillar (CAT +2.85%), and industrial supply company Fastenal (FAST +2.37%) are the ones to watch. Here's why and what to look for with these three industrial stocks.
1. 3M: Providing monthly updates rather than full-year guidance
The industrial giant 3M has withdrawn its full-year guidance on the back of the uncertainty created by the COVID-19 pandemic. However, on the company's recent earnings call, CEO Mike Roman said, "Starting in May, we will provide monthly updates on how our business is performing and we will continue to provide this until we are better able to forecast future performance." In addition, CFO Nick Gangestad went on to outline that management would provide insights on trends by "business and geography."
The economy is headed for a period of significant volatility. Image source: Getty Images
3M offers a wide array of products that straddle end markets as diverse as automotive (aftermarket and original equipment), personal safety, industrial adhesives, electronics, medical consumables, dental care, and home improvement. As such, its management has a pretty good handle on trends in the economy. Moreover, the breakout by industry and geography will be very useful to see which sectors/stocks might bounce back quickest.
In particular, it will be interesting to see if China -- the country in which the COVID-19 pandemic originated and one of the earliest to start to normalize economic activity after the worst of the disease had run its course -- will have a sustained recovery, particularly in its automotive sector.
|
Segment |
Q1 2020 Revenue |
Q1 2019 Revenue |
3M Business Groups With Sales Above $250 Million in Q1 2020 (Above $500 Million in Bold) |
|---|---|---|---|
|
Safety and industrial |
$2.94 billion |
$2.96 billion |
Abrasives, automotive aftermarket, closure and masking systems, electrical materials, industrial adhesives and tapes, personal safety |
|
Transportation and electronics |
$2.24 billion |
$2.36 billion |
Advanced materials, automotive and aerospace solutions, commercial solutions, electronics |
|
Health care |
$2.10 billion |
$1.74 billion |
Health information systems, medical consumables |
|
Consumer |
$1.26 billion |
$1.20 billion |
Home care, home improvement |
Data source: 3M presentations.
2. Caterpillar: Indications are it's going to get worse
The heavy equipment manufacture is releasing its three-month rolling retail sales data every month, as management believes it's the best way to monitor trends in its business. The chart below demonstrates that a picture really can be worth a thousand words. Caterpillar's sales were in a downtrend even before the coronavirus pandemic came, and hopes of a second-half recovery have obviously been dashed by fears of a recession.
Data source: Caterpillar presentations.
The overall data is obviously going to get worse in the coming months, but the extent and length of the drop is unknown. In addition, some of the granular-level detail will be fascinating. For example, given that China is normalizing its economy first, it's reasonable to expect relatively stronger numbers coming out of the Asia/Pacific region for Caterpillar. Of course, there's no guarantee that Europe and North America will follow the trend, but it's still worth following closely as a leading indicator.
The chart below shows how Caterpillar's retail sales in Asia/Pacific fell off a cliff in early 2020 when the outbreak first occurred in China. However, some stabilization will likely occur in Asia/Pacific at least in the coming months, even as the numbers from Europe and North America start to worsen when April is included.
Data source: Caterpillar presentations.
3. Fastenal: First hit, first to recover?
Industrial supply companies always give great color on the economy, because their sales are the first to get hit in a slowdown and the first to recover when growth returns. As such, the monthly sales data from Fastenal -- set to be released on May 14 -- will be indicative of just how bad manufacturing conditions will be in the second quarter.
The numbers in March were bad, but they are likely to get even worse in April. As incredible as this may sound, the March numbers might actually contain some pull-forward in demand as manufacturers may have stocked up in fear of not being able to source supplies later on -- at least that's what fellow industrial supply company MSC Industrial Direct (MSM +3.56%) said happened in its quarter. In common with Fastenal, MSC's sales are heavily tied to the operational activity of its manufacturing customers.
Data source: Fastenal presentations. Year-over-year growth.
While the average daily sales growth numbers for April are likely to be horrendous, investors will want to see just how bad they are before beginning to hope for a sequential uptick in May. It's definitely a number that investors should keep a very close eye on in the next few months.
