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Fastenal (FAST) Q1 Earnings: Can Solid Sales Ease Margin Woes?

Zacks Equity Research

Fastenal Company FAST is scheduled to report first-quarter 2019 results on Apr 11, before the opening bell.

In the last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. That said, it surpassed the consensus mark in two of the trailing four quarters, while met the same twice, with average positive earnings surprise of 3.8%.

Notably, fourth-quarter 2018 earnings and revenues recorded an improvement of 34.9% and 13.2%, respectively, courtesy of accelerated growth across its non-residential and construction sections of the business.

Fastenal Company Price and EPS Surprise

Fastenal Company Price and EPS Surprise | Fastenal Company Quote

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is currently pegged at 66 cents, remaining unchanged over the past 60 days. Nonetheless, this reflects an increase of 8.2% from the year-ago earnings of 61 cents per share. Revenues are expected to be $1.3 billion, up 9.6% year over year.

Let’s see how things are shaping up for this announcement.

Key Factors

Solid underlying industrial market demand and growth in core product offerings like Onsite Locations/vending machines/managed inventory are expected to benefit Fastenal in the first quarter of 2019.

Higher End-Market Demand: Robust construction market, especially the non-residential one, has been acting as a major tailwind for Fastenal’s performance over the last few quarters. The company’s sales grew 13.2% year over year in fourth-quarter 2018, marking the sixth straight quarter of at least 13% growth. Non-residential construction grew 14.8% and manufacturing increased 13.3% during the quarter.

Vending Machines to Drive Growth: Over the last few quarters, Fastenal’s sales have been driven by an increased installation of industrial vending machines. Sales through vending devices continued to grow at a double-digit pace, primarily due to higher installed base. Moreover, Fastenal’s signings of industrial vending devices grew 13.6% year over year in 2018 and increased 16.7% in the fourth quarter.

Onsite Locations to Boost Sales: A consistent increase in the number of on-site locations is likely to strengthen Fastenal’s market share and boost quarterly numbers. As of Dec 31, 2018, it had 894 active sites, up 47.8% from a year ago. The increased number of onsite locations is likely to expand Fastenal’s market share. The trend is expected to continue in first-quarter 2019 as well. The company aims at achieving 375-400 onsite signings in 2019, reflecting an increase from 336 signings a year ago.

In a nutshell, sustained strength in most of its end markets, and strong momentum in vending machine installations and onsite locations are likely to support top- and bottom-line growth in the to-be-reported quarter.

However, increased product costs, higher freight expenses, and changes in product and customer mix have been impacting its gross margins for quite some time now.

Gross Margin Pressure: Fastenal’s changes in product and customer mix have been hurting gross margin for quite some time now. In 2018, gross margins contracted 100 basis points year over year mainly due to product and customer mix, as well as freight inflation.

Here is What Our Quantitative Model Predicts:

Our proven model does not suggest that Fastenal is likely to beat estimates in the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as you will see below.

Earnings ESP: The Earnings ESP for the company is 0.00% as the Most Accurate Estimate and the Zacks Consensus Estimate are both pegged at 66 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Fastenal currently has a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks to Consider

Here are some companies in the Zacks Retail-Wholesale sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported:

The Home Depot, Inc. HD has an Earnings ESP of +0.62% and a Zacks Rank #3.

AutoZone, Inc. AZO has an Earnings ESP of +2.49% and holds a Zacks Rank #2.

Advance Auto Parts, Inc. AAP has an Earnings ESP of +3.48% and a Zacks Rank #3.

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