We have downgraded our rating on
Fastenal Company
(
FAST
) from Neutral to Underperform following unimpressive second
quarter results.
Though the company's second quarter 2012 earnings of 38 cents
per share beat the Zacks Consensus Estimate by a penny, total
revenue of $805 million was below Zacks Consensus Estimate of $806
million mainly due to a slowdown in sales to manufacturing
customers. Daily sales growth rates declined sharply in the quarter
due to a sluggish market as well as foreign currency headwinds.
Daily sales growth rates stood at 17.3%, 13.1% and 14.0%,
respectively, for the months of April, May and June, significantly
down from the daily growth rates in the corresponding prior-year
months. Daily sales to manufacturing customers (representing almost
50% of revenues) grew 15.8% in the second quarter, much below
growth of 18.5% in the prior-year quarter and 20.3% in the
sequentially preceding quarter. In the second quarter, sales growth
of fastener products used mainly for industrial production was
significantly less than the first quarter and even less than 2011
and 2010. The sequential change in daily sales for the first half
of 2012 was also below historical averages highlighting the rising
uncertainty in the growth outlook of Fastenal's end markets.
Fastenal's current business strategy involves the opening of new
stores at a very fast pace. Though this builds the infrastructure
for future growth, it significantly hurts near-term profitability
due to the start-up costs involved in opening a new store.
Moreover, a new store takes time to build a customer base and
typically requires 10 to 12 months to achieve its first profitable
month. Moreover, opening stores in new locations also pose
challenges.
The company had introduced its 'pathway to profit' strategy, in
2007, which called for a slowdown in the pace of store openings and
instead use the resultant savings to increase the headcount in
stores. This plan aimed to increase average annual per store sales,
capturing earnings leverage, and increasing pre-tax
earnings. The company aimed to grow its average store sales to
$125 thousand per month in order to achieve pre-tax earnings growth
as a percent of net sales of 23% (up from 18%) by 2012. However,
the company failed to achieve its goal as the new store opening
plan was reduced to a range of 2%-5% and headcount additions were
almost stopped during the economic setback in 2008-2009. Now, with
the economy slightly improving, the company hopes to meet its
pre-tax earnings percentage goal with less than the $125 thousand
per month figure. Fastenal believes the pre-tax earnings percent
goal of 23% might be accomplished with average store sales as low
as $100 to $110 thousand per month through cost control in 2013. We
are skeptical of the company's ability to achieve the set
targets.
All these factors combined with the margin pressures due to
rising cost of fuel has forced us to downgrade our recommendation
on shares of Fastenal.
FASTENAL (FAST): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research