Fastenal Company (FAST) is set to report fourth-quarter and full year 2014 results on Jan 15, before the market opens.
Last quarter, Fastenal delivered in-line results as a strong top-line performance was offset by weaker margins. Let’s see how things are shaping up for this announcement.
Factors to Consider this Quarter
After struggling for several quarters, Fastenal’s top line turned around in the first quarter of 2014 and continued into the second and third quarters. End-market slowdown and broader economic uncertainty were lowering fastener sales which, in turn, weighed down Fastenal’s top line. In order to accelerate sales growth, Fastenal took the strategic decision to increase sales personnel at its stores which largely boosted sales during the year. Importantly, easy comparisons from a relatively weaker 2013 also contributed to the sales growth rates in 2014. In fact, fasteners recovered slightly in 2014 after struggling in 2013. Moreover, vending trends improved in all the quarters of 2014 and the construction business is showing signs of improvement.
The monthly sales data released for October and November (included in the fourth quarter) shows that the top-line improvement continues. Daily sales grew 14.6% in October and 15.3% in Nov. In fact, the industrial and construction supplies wholesale distributor has recorded eight consecutive months of double-digit growth in daily sales.
However, Fastenal’s margins are contracting as management’s focus shifts away to top-line improvement. An unfavorable product mix, pricing and competitive pressures are hurting gross margins. In fact, management apprehends gross profit to be soft in the fourth quarter. The fourth quarter is seasonally the softest as sales slow down during the holiday months of November and December. Construction activity also softens during this time. The softer sales result in lower utilization of Fastenal’s trucking network which can hurt gross margins.
Moreover, management has been slowing down store growth to increase headcount to drive near-term sales. Such initiatives increase employee costs. Higher store headcount and field leadership as well as higher investments behind vending are increasing operating costs, thus dragging pre-tax margins. The accelerated hiring pace continued in the fourth quarter, which could further pressure margins.
Despite the top-line improvement, the margin pressures keep us concerned.
Earnings Whispers?
Our proven model does not conclusively show that Fastenal is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00%.
Zacks Rank: Fastenal’s Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies in the building sector for investors to consider, that, according to our model have the right combination of elements to post an earnings beat this quarter:
PulteGroup, Inc.(PHM), with Earnings ESP of +2.44% and a Zacks Rank #2 (Buy).
Armstrong World Industries, Inc. (AWI),with Earnings ESP of +10.71% and a Zacks Rank #2.
Owens Corning (OC), with Earnings ESP of +2.38% and a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment