See
more of the story
The canaries in Winona are singing. Around the country, people are listening.
Fastenal Co., the seller of construction and industrial supplies based in Winona, last week revealed an abrupt slowdown of sales growth in March. For people looking for signs that the U.S. is getting closer to recession, this was one.
"Since they are involved in almost every part of the U.S. economy, their calls mean something," Peter Boockvar, chief investment officer at Bleakley Financial Group, told readers of his investment newsletter over the weekend.
Manufacturers are tightening their spending, Fastenal executives said last Thursday. They cautioned that one month's performance didn't mark a trend and praised their employees for adjusting on the fly.
"We do continue to anticipate that we will outgrow our marketplace, which frankly isn't growing right now," Holden Lewis, Fastenal's chief financial officer, told analysts on the quarterly results call that morning.
The company didn't sign as many new contracts during the first three months of the year as executives hoped. In its report on the news from Fastenal, Bloomberg noted, "This metric in the past has been an indicator of slowing economic activity."
Fastenal, which had about $7 billion in sales last year, has a regular group of investment analysts who cover it. But its news last week was amplified by other analysts who chiefly look for signals about the broader economy.
Since the 2008-09 recession, Fastenal became known not just for its growing stature as a supplier in the construction and manufacturing industries but for disclosing financial results and insight in a clear, straightforward manner.
I noticed this in 2014, not long after I arrived in Minnesota, when I was assigned to write about a Fastenal results announcement. In that particular quarter, the company's news release noted that business leaders often face a choice between growing sales or profits. It then explained what its executives had done in that quarter.
"Today the dial is closer to sales growth, and this is reflected in a lower gross profit percentage," Fastenal said in 2014. I remember thinking how rare it was for a company to directly state what's going on.
Last week, its executives responded candidly when analysts asked for more details about the March slowdown.
The company's CEO, Daniel Florness, described what's happening with its original equipment fasteners, which include bolts, screws, nuts, washers, anchors and rivets. They account for about 20% of Fastenal's overall revenue.
"That business was growing around 13.5% in January. In March, it grew 7%. So that is production dropping off," Florness said.
"That's great color, thank you, guys," one analyst responded.
In an email this week, Lewis told me he and Florness assume three things about Fastenal's investors: that they are smart and can read numbers, that they are responsible with facts and they know the company is not being run to have a good quarter but to be better "three and five years from now than we are today."
"Spinning, omitting or avoiding something will only serve to make shareholders and analysts suspicious of the information we publish," he wrote.
He added, "In our view, transparency begets confidence, and confidence supports a healthy multiple. And all that applies not just to macro trends, which are out of our control. We will try to be transparent if we don't execute an initiative effectively."
That approach in part is rooted in Lewis' prior experience as a stock analyst. "I covered a lot of companies," he wrote. "We knew when something didn't add up and, when companies won't connect the dots, it just fosters rumors, speculation and distrust."
Fastenal's latest profit came in just above analysts' expectations and sales of just under $1.9 billion were right in line with them. The company's stock initially fell about 5% on last Thursday's news, but it recovered and ended last week higher. On Tuesday, Fastenal shares remained firmly above Thursday's dip.
Broader data for months has suggested that manufacturing is slowing. Just a few days before Fastenal announced results, the Institute for Supply Management reported that the monthly index it creates from a national survey of purchasing managers was below 50 — an indication of declining activity — for a fifth straight month.
This is the slowdown that the Federal Reserve, along with central bankers around the world, have been seeking in the fight against inflation. The risk is that their main tool, interest rate policy, is too blunt and that the economy will tip into recession, leading to job losses and other pain.
The Fed is helped by executives like Florness and Lewis, who are candid about their business even when the news isn't good. Its policymakers need canaries in Winona, and around the country, to give them a sign their blunt tool is working — and a warning when it's about to go too far.
