On Aug 7, we maintained a Neutral recommendation on
) following mixed second-quarter 2013 results. However,
continuous weakness in its top line is disturbing.
Why the Neutral Recommendation?
This industrial and construction supplies company announced
second-quarter 2013 results on Jul 10. Adjusted earnings of 41
cents per share were in line with the Zacks Consensus Estimates
but grew 7.9% year over year on the back of decent gross-margin
growth. Revenues missed the Zacks Consensus Estimate despite a
5.3% growth. The company continues to struggle with sales growth.
Top-line growth was slow due to soft fastener sales and weakness
Fastenal's daily sales growth rates have been weak since the
last 3 - 4 quarters mainly due to a weakness in its fastener
product line caused by end-market slowdown and broader economic
uncertainty. From more than 15% growth in the first quarter of
2012, the fastener product line, which accounts for more than 40%
of company sales, dropped to 1.9% growth in the second quarter of
2013. Industrial vending was also soft in the second quarter.
Estimates have mostly shown a downward trend after the weak
Though management is consciously slowing down the vending
signing pace to focus instead on quality of vending contracts,
industrial vending still remains one of Fastenal's primary growth
drivers. It has the potential to significantly increase the
company's sales and profits. Interestingly, management is
deliberately slowing down focus on vending and instead
encouraging stores to improve near-term sales. We believe this is
a prudent strategy to improve its top line. Further, the
strategic decision to slow down store growth and instead increase
headcount will drive near-term sales growth.
We are also encouraged by Fastenal's other growth drivers like
government business and metalworking, which are gaining traction
and could help achieve profitability in 2013 and beyond. We,
thus, remain on the sidelines on solid long-term
Other Stocks to Consider
Fastenal carries a Zacks Rank #3 (Hold). Other companies in
the sector that are doing well include
Lumber Liquidators Holdings, Inc.
Builders FirstSource, Inc.
The Home Depot, Inc.
). While Lumber carries a Zacks Rank #1 (Strong Buy), The Home
Depot and Builders FirstSource carry a Zacks Rank #2 (Buy).
BUILDERS FIRSTS (BLDR): Free Stock Analysis
FASTENAL (FAST): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
LUMBER LIQUIDAT (LL): Free Stock Analysis
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