Fastenal's (FAST) Q3 Earnings In Line, Gross Margin Down

Fastenal Company’s (NASDAQ:FAST) earnings of 50 cents per share in the third quarter of 2017 were in line with the Zacks Consensus Estimate. Earnings also grew 13.4% year over year.

Sales Detail

Net sales of $1.13 billion were in line the Zacks Consensus Estimate. Sales grew 11.8% year over year driven by higher units owing to improvement in underlying market demand and growth in industrial vending business and existing Onsite locations.

Fastenal’s daily sales grew 13.6% in the quarter, better than the 10.6% increase in the second quarter of 2017.

On a monthly basis, daily sales increased 15.3% in September, 12.8% in August and 12.9% in July, compared with 2.8%, 0.3% and 2.1%, respectively, a year ago.

Sales of fastener products (used mainly for industrial production and accounting for approximately 35.6% of the company’s third-quarter sales) increased 12.1% in the quarter, 3.8% of which came from the acquisition of the Manufacturers Supply Company (Mansco) business. Non-fastener product sales (used mainly for maintenance and represented 64.4% of the quarterly sales) increased 14.6%.

Fastenal Company Price, Consensus and EPS Surprise

Vending Trends and Other Growth Drivers

As of Sep 30, 2017, Fastenal operated 69,058 vending machines, up 14.3% year over year. During the quarter, the company signed 4,771 machine contracts, in line with the year-ago figure.

After a soft 2013, vending trends improved through 2014, 2015 and 2016 as management’s efforts to enhance the quality of signings/installs paid off.

Fastenal signed 81 new Onsite locations during the quarter, up 97.6% from 41 signings a year ago. As of Sep 30, 2017, the company had 555 active sites, representing an increase of 47.6%.

Additionally, Fastenal signed 42 new national account contracts in the third quarter (representing 48.7% of its total revenues in the quarter). Net sales from its national account customers grew 17.3% in the quarter on a year-over-year basis.

Margins

Gross margin of 49.1% in the third quarter of 2017 declined 20 basis points (bps) year over year owing changes in product and customer mix, the addition of Mansco (which has a lower gross profit product mix than the company), disruption owing to the recent hurricanes and commodity inflation.

Operating margin improved 20 bps year over year to 20.2% in the quarter, mainly driven by lower operating and administrative expenses.

Financials

Cash and cash equivalents were $133.4 million as of Sep 30, 2017, up from $112.7 million as of Dec 31, 2016. Long-term debt was $432 million, up from $379.5 million at the end of 2016.

Zacks Rank & Key Picks

Fastenal carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the industry are Lumber Liquidators Holdings, Inc (NYSE:LL) , Beacon Roofing Supply, Inc. (NASDAQ:BECN) and The Home Depot, Inc. (NYSE:HD) .

Lumber Liquidators sports a Zacks Rank #1 (Strong Buy) while the other two companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumber Liquidators is expected to see 73% growth in 2017 earnings.

Beacon Roofing is likely to witness 4.6% earnings growth in fiscal 2017.

Home Depot expects earnings growth of 13.3% in fiscal 2018.

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