Why Fastenal Company Stock Is Dropping Fast Today

A thorough explanation behind Fastenal's falling share price.

Jan 15, 2014 at 3:00PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of industrial and equipment supplier Fastenal Company (NASDAQ:FAST) are dropping like a piece of heavy equipment today, down as much as 7.9% following fourth-quarter results.

So what: Fastenal reported fourth-quarter earnings of $0.33, missing estimates by a penny. Revenue came in at $813.76 million, a hair above the estimate of $813.25 million. On a year-over-year basis, sales were up 7.5% and earnings per share were flat. This might not sound too bad, but the bigger problem is due not so much to the numbers, but to comments made by the company.

Now what: Fastenal had issued a rare press release in December due to its concern about its fourth-quarter results. It was only the second time in the company's 26 years of being public that it made such communication. The company saw sales and margins getting weak during the month of December; following the warning from the company, sales and margins continued to get even weaker. This led to flat EPS despite the healthy sales increases, because margins were weakening worse than the company expected.

Fastenal had expected margins of between 51% and 53%. With all other things being equal, lower margins tends to hit the bottom line directly. In this case, they stopped any additional profit to the bottom line from being added from the healthy sales gains, compared to last year.

Fastenal cited several reasons for the weakness, including lower utilization of its trucking network, supplier incentives, product mix, and "a very competitive marketplace." The company expects and hopes to return to better profit margins for 2014.

Fastenal's growth has been much slower throughout 2013 compared to the 2010-2012 period. Part of this was blamed on "poor weather during the winter and spring time frame throughout many areas in North America." This also occurred in December as the company claims the weakness in that month was "amplified due to poor weather conditions." The timing of the July 4 and Christmas holidays compared to last year had a negative impact as well.

Another area of weakness occurred with Fastenal's non-residential customers. Historically, these customers used to represent between 20% and 25% of the company's business. Beginning in late 2012, this business appears to have been hit very hard, representing only around 2.5% of sales in 2013. The company explained: "We believe the weakness in the economy in the fourth quarter of 2012 and throughout 2013, particularly in the non-residential construction market, was amplified by global economic uncertainty combined with economic policy uncertainty in the United States and poor weather conditions."

Fastenal stated it plans to attack the weakness by "actively working on the internal component and are positioning our business to take advantage of improvements in the industrial economy." The company was shy on details on this other than to state it plans to provide greater value and service to its customers while finding new customers.

There is enough uncertainty to go around with Fastenal that should give cautious Fools some pause. With the company trading at 26 times this year's estimated earnings, it would appear that a successful turnaround is already priced in. For a long-term investment, it may be a good idea to wait either for cheaper prices or solid evidence of earnings that will be higher than analyst expectations. Given that the company has experienced near-term weakness that it didn't see coming, it's much more difficult for investors to invest with confidence.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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