Monday, July 13, 2009

Fastenal Earnings Down, but the stock is holding its ground (FAST)

AlphaNinja - Industrial and construction supplier Fastenal Co. (FAST) reported earnings this morning, and the stock's reaction is among the worst kind of days for people who are short the stock.



Fastenal reported 29cents per share of earnings, 4cents below the street expectation of 33cents. Interesting commentary from the release:

"As we saw in the previous two quarters, the weakened economy continues to have a substantial impact on our business. These impacts continue to negatively affect our sales, particularly related to our industrial production business (business where we supply products that become part of the finished goods produced by others) and, more recently, our non-residential construction business. To place this in perspective - our manufacturing customers (historically approximately 45% to 50% of sales) contracted approximately 28% in the second quarter versus the prior year. This contraction is less severe in the maintenance portion of our manufacturing sales (business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing), but more severe in the production business. Our non-residential construction business (historically 20% to 25% of sales) contracted approximately 23% versus the prior year. The remaining business (sales to other resellers, government business, other industries, and in-store retail sales) is producing better results, but unfortunately, doesn't have enough impact to offset the manufacturing and construction impact. On a sequential basis, our manufacturing daily average sales improved in both May and June (versus the previous month). This was the first sequential improvement since September 2008. However, this improvement was offset by continued weakening in our non-residential construction business."

A look at the income statement shows an accelerating decline in operating income:




The store-level data is particularly interesting. The average store age is dropping thanks to expansion, and the impact on profitability is huge. Fastenal continues to enjoy a serious "market premium" in terms of the Price/Earnings ratio afforded the shares, about 20. It will continue to confound the shorts.



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