Another Weak Quarter for Fastenal

Zacks

Fastenal Company (FAST) reported diluted earnings of 33 cents per share in the fourth quarter of 2012, up 10.0% on the back of decent margin growth. The company’s earnings were in line with the Zacks Consensus Estimate.

Fastenal reported net sales of $757.2 million, up 8.5% year over year. Revenues were also in line with the Zacks Consensus Estimate.  Both earnings and revenues declined sequentially.

We believe that the fourth quarter was the weakest for the company in terms of sales growth. Fastenal serves customers in the manufacturing and non-residential construction markets. It performed poorly in both the markets.

Quarter Details

Fastenal’s daily sales growth rates in the second, third and fourth quarters of 2012 have been lower than that of the first quarter as well as year-ago comparable periods.

Daily sales growth rates declined sharply in the fourth quarter due to end market slowdown, the negative impact from Hurricane Sandy and foreign currency headwinds. Daily sales growth rates stood at 6.8%, 8.2% and 9.7% for the months of October, November and December, respectively, significantly down from the daily growth rates of 21.4%, 22.2% and 21.2% in the corresponding prior-year months.

The sequential change in daily sales for 10 months from January to October also fell short of historical averages. Foreign exchange negatively impacted the fourth quarter daily sales growth rates by 0.1%.

Daily sales to manufacturing customers (representing almost 50% of revenues) grew 9.7% in the fourth quarter, much below the growth of 21.0% in the prior-year quarter and 14.0% in the preceding quarter. Daily sales growth rates to manufacturing customers have declined sharply due to lower sales of its fasteners product line, which are being hurt by end market slowdown and broader economic uncertainty.

In the non-residential construction market, daily sales to the non-residential construction customers (representing 20% to 25% of revenues) grew 4.2% in fourth quarter of 2012, down from 17.4% recorded in the fourth quarter of 2011 and 8.2% in the third quarter of 2012. Management blamed the weakness in the overall non-residential construction market and the political instability in U.S for the decline in this business.

Vending Machine Activity is Gaining Traction

The company has adopted FAST Solutions, an industrial vending process that has the potential to revolutionize the industrial distribution system and increase profitability. The company installs vending machines that aid in controlling inventory and administrative costs while reducing product consumption. Despite all overall weak sales, the company is seeing some progress around its vending program.

In the fourth quarter, the company installed 4,082 machines with the cumulative machines installed standing at 21,095 at the end of the year. The vending machines now account for over 25% of the company’s sales. During the quarter, the company signed 5,591 vending machine contracts, up 4.8% sequentially. The daily sales growth to customers using vending machines was 28.6% in the fourth quarter, down from 40.7% in the prior-year quarter and 32.9% in the prior quarter.

In 2013, the company aims to sign 2,500 machines per month or 30,000 per year, much more than its earlier expectation of signing 2,500 machines per quarter or 10,000 per year.

Margins

In fourth quarter of 2012, gross margin improved 40 basis points from the prior-year quarter to 51.6% due to lower freight utilization, which in turn was due to low business volume. The company believes that its normal gross margin range is 51% to 53%.

Annual Results

In fiscal 2012, the company witnessed a 13.3% increase in revenue to $3.13 billion, in line with the Zacks Consensus Estimate. Adjusted earnings were $1.42 per share, which were also in line with the Zacks Consensus Estimate. Earnings increased 17.4% from prior year.

Fastenal carries a Zacks Rank #3 (Hold). However, we cannot rule out a rating downgrade with yet another weak quarter being reported.

With the overall housing market improving steadily, there are many housing companies that are currently performing well, have a bright outlook and are worth considering. These include Hovnanian Enterprises, Inc (HOV) – Zacks Rank #2 (Buy), Meritage Homes Corporation (MTH) – Zacks Rank #1 (Strong Buy), and PulteGroup, Inc (PHM) – Zacks Rank #2.

Read the Full Research Report on FAST

Read the Full Research Report on PHM

Read the Full Research Report on HOV

Read the Full Research Report on MTH

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