Fastenal's (FAST) Earnings Hint at What is To Come

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Earnings season is just beginning as companies release their results for Q2 2019, and that will come as a relief for many market watchers. After a few months of trying to read the minds of the Fed and following the Presidential Twitter feed, it will be nice to get back to more mundane, measurable things like corporate profitability.

Or at least, that is the theory, but if early indications are anything to go by, this earnings season will be more about opinion and speculation than the traditional metrics of EPS and revenue.

Fastenal (FAST) was one of the first companies to release second quarter earnings when they did so Thursday morning. The Minnesota-based company is the largest U.S. manufacturer and distributor of fasteners and is traditionally one of the first companies to report. Despite that, though, they are not widely seen as an indicator of what is to come, probably because a large part of their business is tied to construction, an industry that has its own cycles within larger economic trends.

This morning, however, was different.

Fastenal missed on both the top and bottom lines, and growth fell below ten percent for the first time in over two years, causing the stock to lose close to five percent in early trading.

All that is interesting information for stockholders and those that follow FAST, but for most people the real interest here came not in the results themselves, but in the reason given for the disappointing numbers.

Fastenal’s management were very clear in the accompanying comments that the tariffs and trade war were almost entirely to blame for the disappointing numbers.

I have no reason to doubt the board when they say that, although cynics might say that tariffs were the obvious excuse for not hitting targets, so the explanation should be taken with a pinch of salt. The details of the release suggest that isn’t the case. The most noticeable change was a 1.8% decrease in margins year on year, something that is logically attributable to a company absorbing some of the cost of tariffs.

Even if it is the case, though, what we heard this morning is still likely to set the tone for the next few weeks of earnings.

Excuses will be pretty commonplace. They are, after all, out there and available. If it isn’t the direct effect of the trade war and tariffs, then it will be the hardship placed on exporters by dollar strength. Those that are currently criticizing the Fed will latch onto the latter as proof of their point, while critics of the Trump administration will highlight the former. There will be a lot of shouting, but investors need to minimize the effects of the noise and concentrate on the underlying trends.

Whether you blame Trump or Powell, the fact is that both sides are readying their excuses in preparation for a disappointing quarter. There will probably still be the usual two thirds of S&P 500 companies beating expectations, but that is because those expectations have been adjusted downward recently in a big way.

According to Bloomberg, over eighty percent of S&P 500 companies have cut their profit outlook in advance of this earnings season, with analysts downgrading at a pace not seen for a couple of years.

That wouldn’t matter that much if the market was priced accordingly, but it is not. As most are probably aware, the S&P 500 broke 3000 for the first time yesterday, and we are going into earnings season with multiples that would be appropriate to booming corporate profits, not profit warnings from a massive majority of companies.

Of course, that doesn’t mean that you should sell everything. Traders have latched onto the chances of a Fed policy reversal and that is what is driving stocks higher. We have seen on many occasions, most notably in 2000 and 2007, that asset prices that are inflating, whether by accident or design, can continue to do so long past the logical endpoint.

Eventually though, the reality of corporate profits always intrudes and, given the possibility of major earnings disappointments over the next few weeks, that means that adjusting your portfolio to a more defensive posture may be a smart move.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Earnings , Economy , Stocks , US Markets
Referenced Symbols: FAST

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