Earnings Preview: Fastenal

Fastenal Co. (FAST) announced that it would release its results for the first quarter of fiscal 2011 before the market opens on April 12, 2011. Winona-based Fastenal earned a profit of 44 cents in the fourth quarter, marginally behind the Zacks Consensus Estimate of 45 cents.

In the upcoming quarter, the Zacks Consensus Estimate for Fastenal is pegged at a profit of 51 cents per share, reflecting an annualized growth of 35%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is just 2%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 5.4%, with a negative surprise only in the last quarter.

Fourth Quarter Review

Fastenal recorded a profit of $65.1 million during the fourth quarter of 2010, up 46.3% from $44.5 million in the year-ago quarter. Consequently, earnings per share improved 46.7% to 44 cents from 30 cents a year ago, a penny behind the Zacks Consensus Estimate of 45 cents per share.

Net sales for the quarter increased 20.3% year over year to $573.8 million, driven by improvement in sales to both manufacturing customers as well as non-residential construction customers of the company. Daily sales to the manufacturing customers surged 17.7% in the quarter and those to the non-residential construction customers rose 10.3%.

During the quarter, Fastenal opened 37 stores, leading to a total of 2,490 stores as of December 31, 2010. The company has indicated its plan to open 150 to 200 new stores during 2011, which is equivalent to an annualized growth rate of 6.0% to 8.0%.

Fastenal’s average store sales were $67,600 per month versus $58,100 per month in the fourth quarter of 2009. The company aims to push average store sales to $125,000 per month.

Gross profit rose 25.6% to $298.6 million in the quarter from $237.7 million in the year-ago quarter. Consequently, gross margin increased to 52.0% from 49.9% in the corresponding period of 2009.

Estimate Revisions Trend

The first quarter 2011 estimate remained unchanged at 51 cents. This implies the analysts’ cautiousness regarding the stock. A slow recovery of the macro economic factors has marred the near-term visibility of the analysts.

Agreement of Estimate Revisions

Only 1 out of the 10 analysts covering the stock for the first quarter of fiscal 2011 has made an upward revision in the last 7 days. However, no downward revision has been made in the past 30 days. A weak construction industry with a very slow recovery has forced the analysts to remain cautious on the stock.

Magnitude of Estimate Revisions

The first quarter 2011 estimate remained unchanged at 51 cents in the last 7 days, last 30 days as well as in the last 60 days. The Zacks Consensus Estimate for the first quarter is 70% higher than the year-ago profit of 30 cents.

Our Take

Fastenal has a widespread customer base in varied markets. This indicates strong market penetration by the company. Besides, Fastenal has undertaken enough initiatives to ensure customer satisfaction and long-term business growth. It has employed a hub and spoke model, along with opening new stores and service centers.

The hub and spoke centres are so located as to meet any type of consumer demand.

However, the macro-economic factors are unfavorable for the sustainable growth of the company. The construction industry is weak. Diesel fuel and gasoline prices are highly unstable. Thus keeping all these in mind, we give Fastenal shares a Neutral recommendation in the long term.

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