Fastenal Earnings Aren't Growing Fast Enough

Fastenal (NASDAQ: FAST  ) is slated to release its quarterly report on Wednesday. Yet although investors expect Fastenal earnings to improve slightly, the big question is whether any growth will be enough to support the stock's rich valuation. Unless Fastenal can provide a nice surprise on the earnings front, the answer to that question is likely to be no.

Fastenal has its foot in two parts of the industrial and construction business, supplying corporate customers with fasteners and other products that they can then incorporate into their own work, as well as selling those products directly to retail customers. With the economy starting to perk up, can Fastenal make its mark and get its growth to accelerate? Let's take an early look at what's been happening with Fastenal over the past quarter and what we're likely to see in its quarterly report.

Stats on Fastenal

Analyst EPS Estimate

$0.41

Change From Year-Ago EPS

7.9%

Revenue Estimate

$857.13 million

Change From Year-Ago Revenue

6.5%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Is Fastenal's earnings growth slowing down too fast?
Analysts have been concerned about Fastenal's earnings growth prospects in recent months, having trimmed a penny per share from their June-quarter estimates and $0.04 and $0.06 respectively from their full-year 2013 and 2014 consensus figures. The stock has reflected that pessimism, having lost more than 5% since early April.

Part of that decline is due to Fastenal's most recent quarterly earnings report, in which the company failed to meet sales expectations. In the company's conference call, Fastenal executives pointed to improving margins and greater signings of customers for its tool and supply vending machines, but even with cost-cutting and other initiatives designed to bolster profits, generally weak economic conditions have contributed to the weak pace of revenue growth.

Worse than that news is the fact that some of Fastenal's competitors have held up somewhat better. MSC Industrial (NYSE: MSM  ) encountered much of the same sales weakness from the metalworking industry that Fastenal saw in its overall results, and both stocks have performed in line with each other over the past quarter. But W.W. Grainger (NYSE: GWW  ) soared after its earnings in April, as it saw its earnings rise more than 14% and boosted its guidance for full-year 2013 revenue and earnings.

At this point, though, some analysts are looking at Fastenal's results almost as a self-fulfilling prophecy, as they not only reflect the recent weakness in economic activity but also are contributing to that weakness themselves. In particular, as data on factory orders and construction activity paint an uncertain picture of the industry's immediate future, Fastenal can only concentrate on making the most of the business opportunities it has and hope that macroeconomic influences stop producing headwinds in the near future.

In the coming Fastenal earnings report, look for the company to discuss how it plans to move forward to accelerate its growth. With Fastenal stock fetching almost 25 times forward 2014 earnings, the company can't afford to see its revenue growth slow any further than it already has if it wants to keep investors happy.

Fastenal's issues provide a great example of how even as U.S. stock markets have reached new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Click here to add Fastenal to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On July 08, 2013, at 11:31 AM, Awebb30 wrote:

    Slow growth is probably the reason 4 different insiders bought stock this year.

  • Report this Comment On July 08, 2013, at 5:15 PM, grahamsway wrote:

    I'm short FAST but it's a tough one. It's a decently run, niche company that seems to have a cult-like following. In those cases, figures like the nasty falling rate of growth over the last 6 to 8 quarters don't matter much.

    The basic short thesis is that its very rich, needs to adapt its business model to the machine dispenser mode which may or may not sustain growth, and is a proxy for the housing market.

    The way I see it is that when the housing market peaks or the general market falters and the FAST cult wavers, then valuation will play a much bigger part in the story.

  • Report this Comment On July 09, 2013, at 10:27 PM, sr2Corvette wrote:

    Shorting this stock is a fool's errand. My firm, and my office in particular, brought this company public in August of 1987. The compounded rate of return, excluding dividends, is north of 27% for that 25 year period. You will have to seek long and hard to match the management expertise of this company. Valuation has always been on the high side and the ROR explains why it holds that distinction. This one to get long when cheap--not to short when it gets expensive. I saw a lot of hedge funds over the past 25 years get eviscerated by taking short positions in FAST.

    Regarding the vending initiative, it will provide a nice single digit tail wind to their growth but their long term strategy is continually taking market share in a $150B market where they have only 5%.

    Don't forget their international focus, either. These guys have always known how to execute. Can you make money shorting it? I am sure you can. But I would suspect that the person who is successful once and tries it ten more times, will likely face a call from their respective margin department.

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