We have downgraded our recommendation on Fastenal from Neutral to
Underperform after it announced dismal fourth-quarter 2013 results.
Fastenal missed the Zacks Consensus Estimate for both earnings and
revenues in the quarter. Adjusted earnings of $0.33 per share were
flat year over year due to weak revenues and gross margins. The
company has been struggling with its top line for the past few
quarters due to lower sales of its fasteners product line which
were being hurt by end-market slowdown and broader economic
uncertainty. Moreover, the construction as well as vending
businesses have also been soft for the past three quarters. Gross
margin was below the company's expectation in the fourth quarter
due to an unfavorable product mix, a competitive marketplace,
reduced supplier incentives and lower utilization of trucking
networks. Also, management has been slowing down store growth in
favor of increasing headcount to drive near-term sales. However,
these initiatives increase employee costs substantially and hurt
Based in Winona, Minn., Fastenal Company (FAST) is a national
wholesale distributor of industrial and construction supplies. The
company distributes its products through approximately 2,700
company-owned stores mostly located in North America.
Around 11% of its net sales is generated from stores located
outside the United States, mainly in Canada. Other company stores
are located mainly in Central and South America and Europe.
Fastenal derives sales from the fastener product line and the
other product line. The fastener product line comprises two kinds
of products, threaded fasteners, and miscellaneous, industrial and
construction supplies and hardware. Threaded fasteners include
products like bolts, nuts, screws, studs and related washers while
miscellaneous industrial and construction supplies and hardware
include various pins and machinery keys, concrete anchors, metal
framing systems, wire rope, strut, rivets and related accessories.
Threaded fasteners are used in most manufactured products and
building projects, and for the maintenance and repair of machines
and structures. Threaded fasteners accounted for 38% of the
company's sales in 2013.
The other product line includes tools, cutting tools, material
handling, janitorial, electrical and welding supplies and many
more. The non-fastener products now represent over 50% of the
Fastenal mainly serves customers in the manufacturing and
non-residential construction markets. In the manufacturing market,
its customers include original equipment manufacturers (OEMs) and
maintenance and repair operations (MRO) while in the
non-residential construction market it serves general, electrical,
plumbing, sheet metal and road contractors.
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