Change Afoot at Fastenal

Industrial and construction supplier Fastenal (Nasdaq: FAST  ) just reported second-quarter earnings that beat consensus analyst projections by a penny. Investors duly rewarded the stock with a new 52-week high, but does the long-term outlook support such enthusiasm?

Fastenal definitely has a stellar track record. Its sales and earnings have grown just about 20% annually for at least the past decade. Second-quarter results weren't as impressive, but the company still managed to post a 13.3% increase in total sales and a 17.7% jump in earnings. Additionally, operating cash flow for the first half of the year almost doubled from last year's period, helping to allay concerns I've had over the firm's cash-generation capabilities.

But still, judging by the earnings press release, Fastenal's business model is somewhat in flux -- not something I like to see for a company trading at a lofty 25 times next year's earnings. Cash flow generation has been running below reported income for at least three years now, and management has conceded that it needs to do a better job managing its working capital.

Additionally, its tried-and-true growth strategy of opening new stores conveniently located close to customers such as MasTec (NYSE: MTZ  ) , Shaw Group (NYSE: SGR  ) , Fluor (NYSE: FLR  ) , and Jacobs Engineering (NYSE: JEC  ) is shifting. Fastenal will increasingly rely on building its "outside sales personnel into existing stores at a faster rate than historical patterns." This could help boost daily sales trends at older stores, which have fallen into the single digits so far this year.

I'm not overly worried, given the company's solid second-quarter results, impressive historical record, and favorable investor sentiment. Still, recent developments have kept me on the sidelines. Today's stock run will likely keep me there for a bit longer, unless cash flow trends show further improvement.      

For related Foolishness:

• Before the Call: Fastenal's Fast Track
• Remodeling to the Rescue
• Fastenal Bolts Ahead

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.