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Will Fastenal (FAST) Turn It Around this Earnings Season?

Zacks Equity Research

Fastenal Company (FAST) is set to report first-quarter fiscal 2014 results on Apr 11, before the market opens.

Last quarter, Fastenal posted a negative earnings surprise of 2.94%. In fact, the company has missed the Zacks Consensus Estimate for both revenues and earnings for two consecutive quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

The company has been struggling with the top line for the past few quarters due to lower sales of its fasteners product line caused by end-market slowdown and broader economic uncertainty. Moreover, the construction as well as vending businesses have been soft for the past three quarters. Ironically, overall sales have not improved despite regular growth programs.

According to the data released by the company, severe weather conditions hurt sales further in the months of Jan and Feb 2014 — the first two months of the first quarter. Accordingly, we do not expect any significant top-line improvement in this quarter as well.

Management has been slowing down store growth in favor of increasing headcount to drive near-term sales growth. However, these initiatives increase employee costs substantially and hurt margins. An unfavorable product mix (due to weakness in fastener products which generate higher margins), pricing and competitive pressures are also hurting gross margins. The accelerated hiring pace is anticipated to continue in 2014 which could further pressure margins.

Management, however, expects gross margins to improve in the first quarter of 2014 from a significantly weak fourth-quarter 2013 as headwinds relating to lower trucking utilization and vendor incentives normalize.

Earnings Whisper?

Our proven model does not conclusively show that Fastenal is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  The Earnings ESP is 0.00%.

Zacks Rank.Fastenal carries a Zacks Rank #4 (Sell). We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum. Estimates for Fastenal have been declining for the last 60 days.

Other Stocks to Consider

Here are some other companies for investors to consider, that according to our model have the right combination of elements to post an earnings beat this quarter:

Builders FirstSource, Inc. (BLDR), with Earnings ESP of +100.0% and a Zacks Rank #3 (Hold).

KB Home (KBH), with Earnings ESP of +4.76% and a Zacks Rank #3.

Vulcan Materials Company (VMC), with Earnings ESP of +17.65% and a Zacks Rank #1 (Strong Buy)

Read the Full Research Report on FAST
Read the Full Research Report on VMC
Read the Full Research Report on BLDR
Read the Full Research Report on KBH

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