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Is Fastenal (FAST) Stock A Buy After Solid Earnings Results?

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Fastenal Company FAST reported a solid quarter wherein revenues of $1.51 billion topped the Zacks Consensus of $1.44 billion and EPS of $0.42 topped the estimated $0.36.

Positives

First, the operating environment bottomed in April, with May and June showing improved trends. This is evident from U.S. PMI of 52.6 in June while the average for the quarter was 45.7.

Second, revenue growth of 10.3% was driven by safety products (masks, PPE, etc) which is a short-term spurt and included sales to new customers, leading to 116% growth in safety products and 260% growth in the government and healthcare business. This offset declines in the core business.

Third, the company’s policy of recruiting students to temporary positions through relationships with four-year state colleges and two-year technical schools was a positive. As schools shut down, many of these temporary workers dropped out. The resultant reduction in part time labor of 15% and reduction in hours worked of 23% lowered full-time equivalent (FTE) cost by 9.4%.

Negatives

First, fastener sales decline of 11.4% in June (16.4% in the quarter) shows an improving trend in the core business that management estimates is tracking 10-15% below the pre-COVID period.

Second, there was a negative mix impact from the surge in PPE sales because of sourcing from non-traditional parties and the fastest possible distribution that at times increased cost.

Third, Onsite signings dropped due to partial or complete shutdown at customers. Margins are expected to remain weak until order size increases (possibly at some point in 2021).

Conclusion

On the one hand, the company sells safety products used by government and other healthcare professionals, so it managed to add to its customer base. While the rate of growth in this business is expected to moderate because of better supply overall, the virus is unlikely to go away overnight. So the continued spike in infections across specific markets should generate continued revenue. Fastenal has built up some inventory and these will likely be burned off this quarter.

On the other hand, the rising PMI indicates that its traditional business will be on a stronger footing in the current quarter, as moderated by infection rates that would impact the pace of reopening.

Management described the environment as being “cautiously optimistic”. The way I see it, Fastenal is one of the few companies with opportunities in a market impacted by the virus as well as one that is free from it. As such, its Zacks Rank #1 (Strong Buy) rating seems justified.

Other buy-ranked stocks in  the industry include BMC Stock Holdings BMCH, Beacon Roofing Supply BECN, Builders FirstSource BLDR, Lowes Companies LOW and Lumber Liquidators Holdings LL.

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Fastenal Company (FAST) : Free Stock Analysis Report
 
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