Fastenal — Third-Quarter Earnings Preview

Industrial and construction supply company Fastenal (NASDAQ: FAST ) reports
earnings for the quarter ending Sept. 30 on Thursday. With mixed signals coming
from the market and economic indicators, investors are right to be cautious
before the company reports results. Fastenal's results are directly impacted
by manufacturing activity. With manufacturing slowing in the third quarter, the
risk for an earnings disappointment increases. In addition, a stronger dollar
could negatively impact overseas sales. Fastenal is a global company, and its
fortunes are tied to the global economy. Despite the headwinds, Fastenal
reported strong sales in August . Wall Street firm Robert Baird downgraded
Fastenal to neutral late last week, putting a price target on the stock of $36
per share. With a strong rally Monday, Fastenal now trades for close to $35 per
share. The mixed signals make it difficult to read the tea leaves with respect
to the third-quarter report. During the past four quarters, Fastenal has met or
exceeded average Wall Street estimates: After Fastenal beat estimates by two
cents per share in the last quarter, expectations for the period ending Sept. 30
have increased. The average Wall Street estimate for the quarter is 33 cents per
share; 90 days ago, the estimate was for FAST to make 32 cents per share. In the
report for the second quarter, the company noted that it expected above-average
growth for the remainder of the year. Analyst estimates for the full year stand
at $1.21 per share. For the following year, Fastenals profits are expected to
grow by 20% to $1.45. At current prices, Fastenal trades for 29 times
current-year estimates of earnings. Click to Enlarge After the last report,
shares of Fastenal jumped, but ultimately that rally failed when the rest of the
market capitulated in mid-July. During the past 12 months, the stock has gained
nearly 30%: Fastenal has held up while stocks across the board have withered. As
a result, the valuation for the company is rich relative to expected earnings
growth from this year to next. The premium is justified as long as operating
performance continues to meet expectations. Monthly sales for the company in
July and August were solidly in double digits. With the company beating or
meeting estimates in each of the past four quarters, investors should expect
more of the same from the company when it reports results Thursday. Fastenal
needs a solid report to maintain its current premium valuation. More important
will be guidance. If that guidance is weak, shares are likely to suffer. There
is simply too much noise to get comfortable trading this stock in advance of
earnings. The most likely outcome is a share price reduction on a report that
simply meets expectations and includes lower guidance for the rest of the year.
I would sit on the sidelines with this one. As of this writing, Jamie Dlugosch
did not own a position in any of the aforementioned stocks.