Fastenal (FAST) Misses on Q4 Earnings, Oil & Gas Sales Hurt

Fastenal CompanyFAST reported adjusted earnings of 39 cents per share in the fourth quarter of 2015, missing the Zacks Consensus Estimate and the prior year quarter earnings of 40 cents by 2.5%, owing to a weak sales performance.

Fastenal Company - Earnings Surprise | FindTheBest

Sales Remain Weak

Mostly in line with the Zacks Consensus Estimate, net sales of $922.8 million decreased 0.4% year over year. Net sales were weak during the quarter mainly due to a drop in consumer discretionary spending and increased frequency of customer plant shutdowns in the last two months of 2015.

Sales slowed down significantly in all quarters of 2015. This Zacks Rank #3 (Hold) company's top line was hurt by lower sales to its customers in the oil & gas industry, a stronger U.S dollar and overall weakness in the industrial economy. Quarterly performance was also hurt by softness in net sales at the Canadian business, which increased about 4% in local currency during the quarter, compared to a 6% increase in the previous quarter.

During the fourth quarter of 2015, the company incurred an additional expense of $4 million, as the company terminated its manufacturing joint venture in Brazil and settled other disputes. While these actions will benefit the company's growth in the long term, fourth-quarter sales were hurt by its immediate financial impact.

Fastenal's total average daily sales declined 2% in the fourth quarter, much lower than the 15.7% increase in the prior-year quarter. Foreign exchange dragged the daily sales growth rate in the quarter by 1.3%.

On a monthly basis, daily sales declined 3.8% in December, 1.1% in November and 0.8% in October. In comparison, the company had recorded daily sales growth of 17.4%, 15.3% and 14.6%, respectively, in the corresponding year-ago months.

This industrial and construction supplies wholesale distributor serves customers in the manufacturing and non-residential construction markets.

Daily sales to manufacturing customers (representing almost 50% of revenues) declined 2.2%, down from growth of 13.8% in the prior-year quarter and 1.1% in the previous quarter. The daily sales growth rate to manufacturing customers softened due to subdued sales of both fasteners and non-fasteners.

The daily sales growth rate of fastener products (used mainly for industrial production and accounting for nearly 40% of the company's business) declined 6.2% in the quarter, compared with the 4.4% decline recorded in the previous quarter and the 11.4% increase in the year-ago quarter.

Lower demand from the heavy machinery manufacturing customer base, mainly from those engaged in oil and gas business, hurt fastener sales due to lower production requirements.

Non-fastener product sales (used mainly for maintenance) increased 1.2%, down from growth of 19% in the prior-year quarter and 5.9% in the last quarter. The non-fastener business also weakened over the last few months as improved vending trends were offset by overall weakness in the industrial environment.

In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) declined 6.1%, which compared unfavorably with a 12.6% increase in the prior-year quarter and a 1.7% decline in the previous quarter. Volatility and softer energy prices hurt sales in this market.

Vending Trends Continue to Improve

As of Dec 31, 2015, Fastenal operated 55,510 vending machines, up 18.5% year over year. During the quarter, the company signed 4,016 machine contracts, down 14.4% from the last quarter. The daily sales growth rate to customers using vending machines was 0.7%, down from 4.8% in the previous quarter. Vending machines now account for 43.9% of the company's sales, higher than 42.1% in the prior quarter.

After remaining soft in 2013, vending trends improved through 2014 and 2015, as management's recent efforts on enhancing the quality of signings/installs paid off. Even though daily sales growth to customers using vending and signings declined sequentially, the percentage of vending customers improved.

Gross Margins Down

Gross margin of 49.9% in the fourth quarter of 2015 declined 60 basis points (bps) year over year and sequentially from 50.5% in fourth-quarter 2014 and third-quarter 2015. Gross margin was below the company's average of around 50% owing to a drop in the consumer discretionary spending, and an unfavorable customer mix and product mix.

The customer mix shifted toward the large account end-market, which produces low-margin gross profit but stronger operating income. The product mix shifted from high-margin fastener products to non-fastener products. In fact, the company expects these trends to continue in the future as well.

Financial Update

Fastenal had cash and cash equivalents of $129.0 million as of Dec 31, 2015, compared with $111.8 million as of Sep 30, 2015. On Jan 14, 2016, the company's board of directors approved a 7.1% hike in its quarterly dividend to 30 cents from 28 cents. The raised dividend of 30 cents will be paid in cash on Feb 26, 2016 to shareholders of record as on Jan 29, 2016.

Stocks to Consider

Some better-ranked stocks in the construction sector include Beacon Roofing Supply, Inc. BECN , Tecnoglass Inc. TGLS and Builders FirstSource, Inc. BLDR . Beacon Roofing Supply and Tecnoglass sport a Zacks Rank #1 (Strong Buy), while Builders FirstSource carries a Zacks Rank #2 (Buy).

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

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

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