Up until Friday, this had been a pretty good run for industrial supply distributors. MSCIndustrial (NYSE:MSM) had a good quarter and the stock has done well. Applied IndustrialTechnologies (NYSE:AIT) likewise had a good quarter and the stock has also responded well. For Fastenal (NASDAQ:FAST), though, on-target financial performance was overshadowed by worries about sales trends, and today the stock has thus far been smacked.
As I said, the results themselves were pretty good on the whole. For the quarter, sales were up more than 20%, operating income grew more than 24%, and earnings per share grew 18% and matched the average estimate. Gross margin ticked up slightly from the year-ago period and, while the operating margin was sequentially weaker, it was still higher than the year-ago level.
The trouble, though, is in sales trends. Unlike MSC, Fastenal is very much a store-based model. Looking at trends for stores open more than two years and more than five years, as well as all store totals, you see month-by-month weakness capped off with a pretty bleak December.
Given Fastenal's aggressive store-opening plans (13% to 18% new stores each year for the foreseeable future), I can understand why investors might be nervous. After all, it takes a few quarters for new stores to get on their feet as it is, and this quarter's sales trends are bound to have people worrying about cannibalization and maybe margins as well.
Even with those worries in mind, there are certainly things to like about this story. The return on invested capital is exceptional and the company continues to accelerate free cash flow production, even as it builds new stores. Nevertheless, I've been concerned about Fastenal's valuation for a while now, and today just drives home the lesson once again: Stocks with robust valuations are prone to sharp corrections when investors suddenly get jittery about growth prospects.
For more related Foolishness:
Fool contributor Stephen Simpson owns shares of MSC Industrial but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).
