On May 6, 2014, we issued an updated research report on Fastenal Company (FAST).
After struggling for the past many quarters, Fastenal’s top line turned around in the first quarter of 2014, results of which were announced on Apr 11. Both earnings and revenues beat the Zacks Consensus Estimate. Adjusted earnings of 38 cents per share grew almost 3% while sales went up 8.7% year over year.
Fastenal’s total average daily sales growth rate in the first quarter was 8.7%, up from 4.9% in the prior-year quarter, owing to increase in sales volume. Though the company witnessed softer sales in January and February due to harsh weather, sales improved in March. The double-digit growth in daily sales in March was driven by favorable timing of Easter and increased investments in stores that led to improvement in sales.
Moreover, despite being slower than March, Fastenal’s April sales were nevertheless significantly better than last year. The Easter holiday proved to be a headwind in April versus a benefit in March.
Management also seems optimistic for top-line and incremental margin growth in future quarters as underlying markets improve, vending re-vamps, sales improvement efforts expand and comparisons remain easy throughout 2014.
However, though sales improved in the first quarter, the company has struggled with the top line for several quarters due to lower sales of its fastener product line. The fastener business continues to be soft due to end-market weakness, especially heavy equipment manufacturers. Though the first-quarter top-line rebound is encouraging, a sustained top-line improvement is required to raise investors’ confidence in the stock.
Moreover, an unfavorable product mix (due to weakness in fastener products which generate higher margins), pricing and competitive pressures are hurting gross margins despite gradual top-line improvement. Further, management has been slowing down store growth in favor of increasing headcount to drive near-term sales growth.
However, such initiatives increase employee costs and hurt margins. The accelerated hiring pace is anticipated to continue in 2014 which could further pressure margins.
Fastenal carries a Zacks Rank #3 (Hold). Better-ranked stocks in the building products/ construction/materials sector include Vulcan Materials Co. (VMC), United Rentals Inc. (URI) and Aegion Corp. (AEGN). While Vulcan Materials and United Rentals sport a Zacks Rank #1 (Strong Buy), Aegion has a Zacks Rank #2 (Buy).