Investor attention moved from trade wars to actual war on Wednesday, as stocks fell on concerns over the situation in Syria. The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) both closed in the red.
Today's stock market
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Crude oil prices jumped to the highest they've been in over three years, boosting energy stocks. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEMKT:XOP) added 1.8%. Financial stocks fell on a flattening yield curve, and the Financial Select Sector SPDR ETF (NYSEMKT:XLF) finished down 1.2%.
Fastenal reports sales growth but declining margins
Industrial supply company Fastenal reported first-quarter results that met analyst expectations, but a drop in gross margin raised concerns with analysts, and the stock fell 6.2%. Sales grew 13.2% to $1.19 billion and earnings per share increased 30.6% to $0.61. Gross margin declined 73 basis points to 48.7% after having fallen 97 basis points in Q4.
Fastener products grew 11.8%, helped by the acquisition of Manufacturers Supply Company in March 2017, which added 1.3 percentage points to the overall sales growth number. Sales of non-fastener products grew 14.5%. The company said that sales growth would have been even higher if it weren't for an abnormal number of route cancellations due to bad weather in the quarter.
Operating income grew 10.4% in the quarter, and CEO Daniel Florness called that performance "frankly not horribly impressive" on the conference call. Despite an improvement in operating expenses as a percentage of sales, the decline in gross margin caused operating margin to decline 50 basis points. Florness blamed product cost inflation as well as increased freight costs for the drop in margin, as the company did not increase prices enough to offset the higher costs. He said that gross margin in Q2 would be comparable to or even slightly lower than the Q1 figure. Analysts on the call were also concerned about the impact tariffs could have on product costs, potentially adding to Fastenal's cost pressures.
Fastenal seems to be on reasonable growth trajectory, and company officials think there is room for price increases to offset costs. But investors focused on the margin issue today, taking the stock into negative territory for the year.
AeroVironment takes off on analyst upgrade
Shares of military drone maker AeroVironment soared 17.1% to $54.28 after Stifel Nicolaus analyst Joseph DeNardi upgraded the stock to buy from hold and raised his price target from $45 to $65. DeNardi sees the company benefiting from improving spending trends at the Pentagon, increased global threats, and a "pipeline of opportunities" that is the strongest he has seen in 10 years of covering the company.
AeroVironment is seeing strong international demand for its family of small military drones. Just two days ago, the company reported a successful maritime test of an automated sensor-to-shoot system that pairs its Puma drone with its Switchblade loitering missile system to defeat fast-moving surface vessels approaching a host vessel.
Today's advance allowed the stock to fully recover from the drubbing it took last month following the release of its fiscal third-quarter results. AeroVironment posted 20% sales growth, which was above expectations, but guidance for full-year sales of between $280 million and $300 million was more conservative than investors were expecting. The upgrade from Stifel lifted hopes for a strong tailwind for sales this year and the next, so worries about the top line receded.