Fastenal: Going Nowhere Fast?

We felt it in the retail markets, as many stores posted lackluster Black Friday sales. Wal-Mart (NYSE: WMT  ) was just about the only company to enjoy a somewhat merry Christmas -- and that wasn't saying much. Yet the industrial and commercial segments of the economy also saw their markets nosedive as the year progressed. Industrial-parts supplier Fastenal (Nasdaq: FAST  ) logged relatively impressive same-store sales gains in October, but could only watch helplessly as November and December turned south.

Even though the construction equipment maker posted 11% higher Q4 net income year over year, comps at stores opened for five years or more -- which the company says best reflect the strength of the overall economy -- turned from a 6.8% gain in October to a 5.1% loss for December. That same trend also appeared at stores open for two years, and in total company sales, which went absolutely flat compared to last year's near-12% gain.

This is the first time in years that Fastenal has seen its comps go negative. The results mirror a Manufacturers Alliance/MAPI survey that found industrial output declining at an accelerating rate, falling 16% in the fourth quarter alone.

The profit gains Fastenal posted were better than those of rival MSC Industrial Direct (NYSE: MSM  ) , which saw a 4% decline in earnings on slightly lower revenue. Fastenal was able to achieve 5% sales growth, but it had to open 161 new stores to get there.

Things seem poised to get worse before they'll improve. According to Morgan Stanley analysts, the industrial economy is expected to contract 3.5% in 2009, compared to a small dip last year. The Bureau of Labor Statistics shows that through November, the U.S. lost more than 2 million jobs, with a 6.7% unemployment rate.

Fastenal has made a conscious decision to slow down store openings. Its near-term profitability is hurt by the new stores, because it takes anywhere from nine months to a year before a store sees its first profitable month. Relying as it does on direct sales, the maker of nuts, bolts, cutting tools, and the like would undoubtedly face even greater profit pressures from a slowing economy.

Many investors' hopes seem pinned on the Obama administration's stimulus packages, and those of other governments around the world. While the stimulus money will supposedly flow to so-called "shovel-ready" projects, which may ultimately shut out some industries or companies, parts suppliers like Fastenal, MSC Industrial, and Lawson Products (Nasdaq: LAWS  ) should benefit regardless.

At roughly 18 times last year's earnings, Fastenal sports a rich price compared to its competitors, including Watsco (NYSE: WSO  ) and W.W. Grainger (NYSE: GWW  ) . It's more comparably priced on a forward basis, but analysts may have to lower their predictions for future growth. They're only expecting a 5% drop in earnings this year, and with national factory activity falling to lows not seen since 1980, perhaps that's not enough. If the recession proves more intransigent than analysts expected, investors might find that Fastenal's going nowhere fast.

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Fool contributor Rich Duprey owns shares of Wal-Mart, but he does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On January 20, 2009, at 10:57 PM, weiwentg wrote:

    Fastenal is highly dominant in its niche, is in the early part of a strong growth trajectory and has an excellent management team, so I think it deserves to be priced more richly than Watsco or Grainger. Clearly even this firm won't emerge unscathed from this recession, but I think that Fastenal at today's price is a buy. There's likely to be more near-term downside to the share price, though.

  • Report this Comment On January 21, 2009, at 4:51 AM, dividendgrowth wrote:

    Fastenal's result can be considered 'great' in such environment.

  • Report this Comment On January 21, 2009, at 4:01 PM, acedogg1968 wrote:

    LMFAO...Are you kidding me? Just go to JOBVENT and read the horror stories from past and present employees!This company is a joke.

  • Report this Comment On January 23, 2009, at 4:00 PM, JoWo1 wrote:

    This stock always shines. Go ahead and sell yours so I can buy more now at a cheaper price--and smile from ear to ear 5 years from now. I used to work at Fastenal, and while I didn't care for the business model as an employee, I sure like it as an investor.

  • Report this Comment On May 31, 2012, at 2:52 AM, yngwie123 wrote:

    funny, I thought FAST was doing great on the NASDAQ... hmmm better do my research

  • Report this Comment On May 31, 2012, at 3:04 AM, yngwie123 wrote:

    Any company that offers employment to thousands of recent college graduates and seasoned workers will surely have a few bad apples. Being an old article, this may have held weight temporarily. Yet, with exceptional growth in both the business and the individual employee, I find little reason to frown the company - minus penurious leadership.

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