How Fastenal Company Weathered the Storm

The future looks bright for this smooth operating supply company.

Apr 14, 2014 at 10:31AM

As most Americans in the northern half of the country can attest, Old Man Winter left his mark over the past six months. And the snow-capped season challenged all stripes of companies, from restaurants to retailers to industrial outlets like the Winona, Minn.-based Fastenal Company (NASDAQ:FAST).

Just as investors looked to turn the page to a new chapter, this wholesale distributor reported mediocre earnings on Friday and rehashed the same old story. Fortunately, Fastenal proved quite resilient from a business perspective and appears to be planting the seeds for future profits.

The nuts and bolts
For starters, the wholesale distributor of industrial and construction supplies reported year-over-year revenue growth of 8.7% on Friday and earnings growth that nudged slightly higher by 2.6%. Neither of these figures overwhelmed the market, and Fastenal's stock fell 1.75% by the close of trading.

According to management, the revenue expansion was a significant move "in the right direction," but operational challenges squeezed margins. Like so many other companies this holiday season, Fastenal blamed "extreme weather" for rising expenses, noting that impediments to a smoothly operating business -- from snow-plowing activities to rising fuel and heating costs -- seemed to plague the entire northern half of the country.

As a result, any progress that was made on the top line was buried in the snowdrift, so to speak, and Fastenal CEO Will Oberton hit the nail on the head with the following statement during the earnings call: "It's very difficult, if not impossible, to grow our earnings relative to sales, when our sales are in the single digit, and our margin was down almost 100 basis points."

Despite these challenges, there's a silver lining for investors. For starters, sales growth could accelerate in the near term even further as clients make up for lost ground on the purchasing end. During March, for example, sales increased an impressive 11.6% year over year, though in part because of the timing of a late Easter holiday.

More importantly, revenue trends over a longer timeframe bode well for Fastenal, too. Since January 2012, monthly sales growth rates averaged 9.9% versus the prior year, and only once did that figure dip below 5%. Of course, a rising hurdle only becomes harder to beat, right? True, but even isolating those stores open for at least five years Fastenal averaged comparable monthly sales growth of 6.8%. Rain, sleet, and snow taken into account, that's a same-store sales trend that most any retailer would envy in today's slow-growth environment.

Finally, this service-oriented company believes it can continue to pack a punch in same-store sales by expanding the footprint of existing stores. The management team laid out plans to boost store size to expand its inventory and better serve a wide range of customer needs. According to Oberton, "We know that many of our stores can be three or four, five times bigger than they are based on their current size, so there's a tremendous amount of opportunity."

Why it's not too late to latch on
All in all, the recent winter season proved challenging, but there's still a tailwind that's nudging the American economy along. That's been the case for about five years, which has led Fastenal's stock into a premium valuation at 33 times trailing earnings.

Nonetheless, a bet on Fastenal is a bet on revenue growth in the $140 billion maintenance, repair, and operations market in the U.S. -- Fastenal's revenue tops $3 billion -- and a margin expansion trend that is likely to continue. For perspective on the latter, Fastenal's operating margins have jumped from 16.7% in 2004 to 21.4% in 2013. Despite the occasional hiccup, Fastenal's on an upward trajectory that's likely to pay dividends for current investors.

Fastenal Store

Source: Wikipedia.

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