Is a Beat in Store for Fastenal (FAST) this Earnings Season?

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Fastenal CompanyFAST is set to report third-quarter 2016 results on Oct 11, before the market opens.

Last quarter, Fastenal posted a negative earnings surprise of 6.25%. The company has posted two positive earnings surprises in the past four quarters. However, it has an average four-quarter negative surprise of 1.65%.

Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Fastenal is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP:Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.22%. This is a meaningful and leading indicator of a likely positive earnings surprise. The Most Accurate estimate is pegged at 46 cents while the Zacks Consensus Estimate stands at 45 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Fastenal carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.

Meanwhile, Sell-rated stocks (Zacks Rank #4 and 5) should never be considered going into an earnings announcement.

FASTENAL Price and EPS Surprise

FASTENAL Price and EPS Surprise | FASTENAL Quote

What is Driving the Better-Than-Expected Earnings?

Fastenal is a wholesale distributor to industrial and construction customers. It serves the manufacturing and non-residential construction markets.

Fastenal's revenues are being hurt by lower sales in the oil & gas industry and softness in the Canadian business. These trends are likely to impact results in the soon-to-be reported quarter. The bearish trend had affected Jul 2016 sales figures, as the company continued to report weakness in its fasteners business. Net sales in July decreased 7.2% while daily sales improved 2.1%.

The picture was quite impressive in the month of August. Net sales in the month increased 9.9% year over year while daily sales improved 0.3%, softer than the July figure. Unfavorable currency impacted sales by 0.3% in the both the months.

Indeed, lack of price inflation, an unfavorable product mix along with pricing and competitive pressure are hurting gross margins. The product mix has shifted from high-margin fastener products to lower margin non-fastener offerings. The customer mix has shifted toward the large-account end-market, which produces low gross margin but high operating income.

However, on a positive note, vending trends improved in the second quarter of 2016. After remaining soft in 2013, vending trends improved through 2014 and 2015 as well as the first half of 2016, as management's efforts toward enhancing the quality of signings/installs paid off. The company intends to increase its investments in the vending program and expects it to outperform in 2016 and beyond.

For the third quarter, the Zacks Consensus Estimate for earnings stands at $1.64, reflecting a 39.3% year-over-year decrease. Meanwhile, the estimate for revenues is pegged at $3.97 billion, implying 2.53% growth.

Stocks to Consider

Here are some companies to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Wingstop Inc. WING has an Earnings ESP of +9.09% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Buffalo Wild Wings Inc. BWLD has an Earnings ESP of +4.00% and a Zacks Rank #2.

Builders FirstSource, Inc. BLDR with an Earnings ESP of +13.16% and a Zacks Rank #3.

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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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