Given the sector's exposure to the economy, investors will be watching industrial stocks with a view to ascertaining the shape of the recovery. In this context, the monthly sales figures from MSC Industrial (MSM -3.32%) will give great color on the state of the manufacturing sector. Meanwhile, industrial giant 3M (MMM -2.47%) has such broad-based exposure that its monthly sales figures will indicate which sectors of the global economy are bouncing first. Finally, FedEx's (FDX -1.52%) fourth-quarter earnings report will update the market on global trade conditions. Let's take a closer look at what to expect in June.
MSC Industrial Supply
The industrial supply companies have very short sales cycles, meaning that as soon as the manufacturing sector changes direction, companies like MSC will see it in their sales figures. MSC is a specialist in metalworking and maintenance, repair and operations (MRO) products and services, so it's literally providing the nuts and bolts to the manufacturing sector.
Image source: Getty Images.
Thus, the chart of its average daily sales growth shows the dramatic impact of the production shutdowns in April. Average daily sales declined 10.5% in April, but the double-digit decline actually began at the end of March. A deeper dive into the company's results shows sales actually grew in the first three weeks of March as customers stocked up in order to avoid any potential sourcing issues in the future.
In this context, it's reasonable to expect another very weak month in May, but just how weak will it be? On the basis that sales tend to decline sequentially from April to May, then something close to April's $235.5 million in sales would be a good number for MSC in May. That implies a 7.2% decline in year-over-year average daily sales. Anything close to that could be seen as a clear sign of a bottom in place.
Data source: MSC Industrial. YOY = year over year.
3M
A true multi-industry industrial giant, 3M makes everything from automotive parts to N95 respirators, oral care products, electronics, industrial adhesives, etc. In fact, management lists 26 different business groups in its quarterly sales detail. The monthly data doesn't quite go into that level of granularity, but management did call out some of the specific areas of strength and weakness on the last sales update.
The table below shows the areas highlighted in the last sales release. There are no prizes for guessing why the personal safety, cleaning, food safety and biopharma businesses are doing well, but it's somewhat surprising to see semiconductors and data centers performing strongly. The strength in semiconductors is a consequence of an ongoing cyclical bounce in the industry following a disappointing 2019.
Meanwhile, data centers have been doing well because the COVID-19 pandemic has encouraged businesses to adopt digital solutions such as working from home and remotely run factories.
| 3M Management Commentary |
April 2020 Sales |
|---|---|
|
Strong end-market demand |
Personal safety, electronics (semiconductor and data center), general cleaning, food safety, biopharma filtration |
|
Significant weakness |
Oral care, automotive original equipment and aftermarket, general industrial, commercial solutions, stationary and office |
Data source: 3M presentations.
Looking ahead to the next update -- due in the middle of June -- it will be interesting to see how businesses like oral care and automotive aftermarket come back. They've been negatively impacted by the social isolation measures, but they are both relatively recession resistant and can do well even if growth is slow after the recovery period.
FedEx
The package delivery giant will give its fourth-quarter earnings at the end of the month, and there are three things to look out for in management's commentary.
First, the trajectory of China's recovery. While there's a case for arguing that China's recovery will serve as a template for the rest of the globe, it's also possible it will fall back due to the weakness in export demand from the U.S. and Europe.
Image source: Getty Images.
Second, global trade conditions in general. It will be interesting to hear management's commentary on the pace of the recovery overall and which sectors of the economy are doing better than others.
Third, e-commerce delivery trends and business-to-business (B2B). The big issue facing FedEx and UPS in the near term is the shift in revenue mix from higher-margin B2B deliveries toward lower-margin business-to-consumer (B2C) e-commerce deliveries. It's certainly hurting margins in the near term, and if it proves to be a more lasting phenomenon, it could lead investors to downgrade their long-term profit and cash flow expectations for both companies. Investors will want to hear that B2B deliveries are coming back, alongside some improvement in global trade conditions.
