On May 6, 2014, we issued an updated research report on
After struggling for the past many quarters, Fastenal's top line
turned around in the first quarter of 2014, results of which were
announced on Apr 11. Both earnings and revenues beat the Zacks
Consensus Estimate. Adjusted earnings of 38 cents per share grew
almost 3% while sales went up 8.7% year over year.
Fastenal's total average daily sales growth rate in the first
quarter was 8.7%, up from 4.9% in the prior-year quarter, owing to
increase in sales volume. Though the company witnessed softer sales
in January and February due to harsh weather, sales improved in
March. The double-digit growth in daily sales in March was driven
by favorable timing of Easter and increased investments in stores
that led to improvement in sales.
Moreover, despite being slower than March, Fastenal's April
sales were nevertheless significantly better than last year. The
Easter holiday proved to be a headwind in April versus a benefit in
Management also seems optimistic for top-line and incremental
margin growth in future quarters as underlying markets improve,
vending re-vamps, sales improvement efforts expand and comparisons
remain easy throughout 2014.
However, though sales improved in the first quarter, the company
has struggled with the top line for several quarters due to lower
sales of its fastener product line. The fastener business continues
to be soft due to end-market weakness, especially heavy equipment
manufacturers. Though the first-quarter top-line rebound is
encouraging, a sustained top-line improvement is required to raise
investors' confidence in the stock.
Moreover, an unfavorable product mix (due to weakness in
fastener products which generate higher margins), pricing and
competitive pressures are hurting gross margins despite gradual
top-line improvement. Further, management has been slowing down
store growth in favor of increasing headcount to drive near-term
However, such initiatives increase employee costs and hurt
margins. The accelerated hiring pace is anticipated to continue in
2014 which could further pressure margins.
Fastenal carries a Zacks Rank #3 (Hold). Better-ranked stocks in
the building products/ construction/materials sector include
Vulcan Materials Co.
United Rentals Inc.
). While Vulcan Materials and United Rentals sport a Zacks Rank #1
(Strong Buy), Aegion has a Zacks Rank #2 (Buy).
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