On Nov 13, we maintained a Neutral recommendation on Fastenal Company (FAST) following dismal third-quarter 2013 results as we have faith in the company’s growth initiatives.
Why the Neutral Recommendation?
This industrial and construction supplies company announced third-quarter 2013 results on Oct 10. Adjusted earnings of 40 cents per share missed the Zacks Consensus Estimate by a penny due to soft revenues and margins. Revenues grew 7.0% year over year, but missed the Zacks Consensus Estimate owing to soft fastener sales and weakness in construction.
Fastenal has been struggling with its top line over several quarters. Fastenal’s daily sales growth rates have been weak since the last 5–6 quarters mainly due to a weakness in its fastener product line caused by end-market slowdown and broader economic uncertainty. From more than 15% growth in the first quarter of 2012, the fastener product line, which accounts for around 45% of the company sales, dropped to 1.0% growth in the third quarter of 2013.
Industrial vending has also been soft for the past two quarters as management intentionally slowed down vending to focus more on the quality of signings/installs. Moreover, management is encouraging stores to focus more on immediate sales growth.
Estimates have mostly shown a downward trend after the weak third-quarter results. The Zacks Consensus Estimate for 2013 has gone down 1.3%, while that for 2014 has gone down 2.2% over the last 60 days.
In order to improve sales, management is slowing down store growth in favor of increasing store headcount to drive near-term sales. However, such initiatives affect margins. We would also like to see substantial sales recovery before becoming more positive on the stock.
Nonetheless, we believe that optimization of the vending machine program, easier comparisons and improved efficiencies from the recently launched vending-specific distribution center, T-HUB, should drive sales and productivity, going forward.
Other Stocks to Consider
Fastenal carries a Zacks Rank #4 (Sell). However, other companies in the building products sector that are doing well include Lumber Liquidators Holdings, Inc. (LL), Builders FirstSource, Inc. (BLDR) and Vulcan Materials Company (VMC). While Builders carries a Zacks Rank #1 (Strong Buy), Vulcan and Lumber carry a Zacks Rank #2 (Buy).
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