Can Fastenal Company Earnings Send the Stock Higher?

On Friday, Fastenal (FAST 0.18%) will release its quarterly report, and investors hope to see solid earnings growth from the supplier of industrial and construction materials. As economic conditions in the U.S. continue to improve, Fastenal wants to grow at a faster pace than peers like HD Supply Holdings (HDS) and MSC Industrial Direct (MSM -0.29%), yet ensuring that margins remain high enough to have sales growth translate into higher earnings is a big challenge for the company going forward.

Fastenal's business doesn't sound all that glamorous, as it supplies construction and industrial businesses with the fasteners and other simple products they need in order to make their own products. That leaves Fastenal reliant on the health of its customers, who need to see enough demand from their own customers to ramp up production and require more components from Fastenal. 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 report.

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Stats on Fastenal

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Can Fastenal earnings grow faster?
In recent months investors have been a bit more optimistic about Fastenal earnings, boosting full-year estimates for this year and next by a penny per share. The stock has gone nowhere, though, falling 3% since early April.

Fastenal has already given investors some guidance on its performance over the past quarter, with monthly sales reports showing solid gains. In April, Fastenal's revenue climbed 10%, with 8.4% gains from stores open at least two years. May's figures showed gains of 13.5% in daily sales, with double-digit comp growth supported largely by manufacturing clients. In light of last quarter's 8.7% jump in net sales, this quarter's figures suggest even better top-line performance.

Fastenal has done a good job of fighting off headwinds to produce that top-line growth. In the first quarter, both it and MSC Industrial noted that the industrial sector has seen improved conditions, and even challenges like harsh winter weather weren't enough to hold down the industry. In addition, Fastenal gets a lot of its business from heavy-equipment sales, where problems in key industries like the mining sector have held back capital expenditures.

But what Fastenal has struggled with is producing bottom-line profit growth from those sales. Last quarter, net income rose only 2.6%, as gross margins fell by more than a full percentage point and operating and administrative expenses grew. Cost containment has been an important element of profitability throughout the industry, with both HD Supply and MSC Industrial also working hard to keep expenses in line. Better work from Fastenal on that front would help it return its profit growth to higher levels.

In the end, Fastenal's key edge lies in its ability to have deep connections with local customers while enjoying the economies of scale of a large business. With efforts like industrial vending that helps Fastenal make the goods that individual clients need ready and available to them, Fastenal continues to work at making customer service its most important goal.

In the Fastenal earnings report, watch to see how the company's sales gains compare to earnings. If earnings growth continues to lag, then Fastenal will need to address how it can boost its margins and keep shareholders happier with its overall results.

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