Fastenal (FAST) Up 9.8% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Fastenal (FAST). Shares have added about 9.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fastenal due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fastenal (FAST) Q4 Earnings In Line, Sales Beat Estimates
Fastenal Company reported fourth-quarter 2018 results, wherein earnings met the Zacks Consensus Estimate, while sales beat the same. Higher market demand, coupled with growth in industrial vending business and existing Onsite locations are encouraging. However, its gross margin suffered due to inflationary pressures.
Earnings & Sales Detail
Fastenal reported adjusted earnings (adjusting for discrete tax items) of 60 cents per share in the quarter, in line with analysts’ expectation. That said, earnings surged 34.9% from 45 cents reported a year ago.
Net sales of $1.23 billion surpassed the consensus mark of $1.22 billion. Sales also grew 13.2% year over year on the back of higher underlying market demand, along with growth in industrial vending business and existing Onsite locations.
The company’s daily sales grew 13.2% in the quarter, lower than 14.8% increase recorded in the prior-year quarter. That said, demand remained strong in the quarter, with average daily sales in December up 14.5% year over year, aided by acceleration in fasteners business (13.1% in December from 10.4% in November) along with manufacturing and non-residential construction markets. Notably, Fastenal’s organic daily sales grew at a 10%-plus rate for 19 consecutive months.
On a monthly basis, daily sales improved 14.5% in December, 12.3% in November and 12.4% in October compared with 13.8%, 15.4% and 14.7%, respectively, in the prior-year months.
Daily sales of Fastener products (mainly used for industrial production and accounting for approximately 34.4% of the total sales) rose 11.3% year over year in the quarter.
Non-fastener products’ daily sales (mainly used for maintenance and representing 65.6% of the quarterly sales) increased 14.6% year over year.
Vending Trends and Other Growth Drivers
As of Dec 31, 2018, Fastenal operated 81,137 vending machines, up 13.6% year over year. During the quarter, the company signed 4,980 machine contracts, up 16.7% year over year.
Fastenal signed 67 new Onsite locations during the quarter, up 17.5% from 57 signings in the prior-year quarter. As of Dec 31, 2018, the company had 894 active sites, up 47.8% from a year ago. It has signed 32 new national account contracts in the fourth quarter (representing 52.4% of the total revenues). Daily sales to national account customers increased 18.1% on a year-over-year basis during the quarter.
Higher Costs Hurting Gross Margin
Gross margin of 47.7% in the fourth quarter of 2018 contracted 110 bps year over year due to changes in product and customer mix, inflation, as well as higher product and freight expenses.
However, operating margin expanded 30 bps year over year to 19% in the quarter, owing to an improvement in operating and administrative expenses.
2018 Highlights
Earnings came in at $2.62 per share in 2018, reflecting 30.5% growth from the 2017 level. Net sales were $4.96 billion, up 13.1% from 2017. Daily sales also grew 13.1% from a year ago.
Financials
Cash and cash equivalents were $167.2 million as of Dec 31, 2018, up from $116.9 million on Dec 31, 2017. Long-term debt was $497 million, up from $412 million at the end of 2017.
Outlook
Given the solid demand trends, Fastenal expects to achieve incremental margin range of 20-25% in 2019.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months.
VGM Scores
Currently, Fastenal has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Fastenal has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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