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Why I Feel Bearish About Fastenal

Fastenal Company (FAST) sells fasteners and other industrial and construction supplies under the Fastenal® product name. This product line consists of two categories: threaded fasteners and miscellaneous supplies and hardware.

In this article, let's take a look at this company and try to explain to investors the reasons I would stay away from this stock.

Lower Margins

Fastenal also boosted its store-based head count to drive sales growth, increasing head count. This made the national distributor of industrial/construction supplies to increase labor in the stores, which impacted in a negative way the margins. Other factors affecting margins are the prices and competition. We see the risk that this trend continues throw out 2014.

Moreover, increases in energy costs and the cost of raw materials used impact the cost of goods and distribution, which result in lower operating margins.

Although management has anticipated a bad performance, it was worse than the expectations due to further weakness in gross margins. Regardless of the high profit margin, it has managed to decrease from the same period last year and was hurt in December due to holiday timing and poor weather conditions. The firm has missed the Zacks Consensus Estimate for both revenues and earnings for two consecutive quarters.

Analyst Recommendation

The firm is currently Zacks Rank # 4 – Sell, and it also has a longer-term recommendation of “UnderPerform”. For investors looking for the high Zacks Rank, Stock Building Supply Holdings, Inc. (STCK) and Travis Perkins plc (TVPKF) could be the options.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 33.6x, trading at a premium compared to the industry mean. Earnings per share (EPS) were flat in the most recent quarter compared to the same quarter a year ago, $0.33 per share for the fourth quarter. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the past history.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has slightly decreased from the same quarter one year prior. This is a clear sign of weakness within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

FAST

Fastenal

25.31

STCK

Stock Building Supply Holdings

-3.63

TVPKF

Travis Perkins plc

11.25

BECN

Beacon Roofing Supply, Inc.

9.63

HD

Home Depot, Inc.

43

LL

Lumber Liquidators Holdings Inc.

25.02

The company has a current ratio of 25.31% which is higher than the one registered by Stock Building Supply Holdings, Travis Perkins plc, Beacon Roofing Supply, Inc. (BECN) and Lumber Liquidators Holdings Inc. (LL). But for investors looking for a higher ROE, Home Depot Inc. (HD) could be the option.

Final Comment

As outlined in this article, increasing employee costs facing a fierce competition in prices, with energy and cost of raw materials that were rising and margins that do not convince either investors or the company´s management, makes me feel bearish about this company.

This time, I do not have a buy recommendation on the stock. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) have sold or reduced positions.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 3.1/5 (8 votes)

Voters:

Comments

chihin
Chihin - 3 months ago

Very superficial analysis. I wonder if the author has even read the annual report.

augustabound
Augustabound - 3 months ago

"The company has a current ratio of 25.31%"

Wow, that's an impressive balance sheet!

But what is the ROE? ;)

Please leave your comment:


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