Will Vending Machines Boost Fastenal's (FAST) Q4 Earnings?

Fastenal Company (NASDAQ:FAST) is scheduled to report fourth-quarter fiscal 2017 results on Jan 17, before the opening bell.

Increased installation of industrial vending machines is expected to boost sales and profits in the to-be-reported quarter as it is one of the primary growth drivers. Sales through its vending machines continued to grow at or near a double-digit pace in each of the first three quarters of 2017. Fastenal signed 15,089 vending machines during the first nine months of 2017, reflecting an increase of 5.5% from the prior-year quarter.

Notably, the average daily sales growth rate of 15.4% in November was higher than the 13.8% increase in October 2017. However, average daily sales growth rate of 13.8% in October was lower than the 15.3% increase in September 2017.

Moreover, a continual increase in the number of on-site locations is likely to expand Fastenal’s market share and contribute to the quarterly numbers. The company signed 213 new onsite locations during the first nine months of 2017 and had 555 active sites as on Sep 30, 2017, reflecting an increase of 47.6% year over year. The company aims to achieve 275-300 onsite signings in 2017, compared with 176 signings in 2016.

We are also encouraged by Fastenal’s acquisition of certain assets of industrial and fastener supply distributor — Manufacturer's Supply Company (Mansco) — in March 2017. This ensures Fastenal’s presence in markets where it has not meaningfully contributed in the past. Mansco contributed 130 basis points (bps) to total sales growth of 11.8% in the last reported quarter and is expected to contribute in the to-be-reported quarter as well.

Based on sustained strength in most of its end markets and strong momentum in vending machines installations and onsite locations, the company is confident about reporting solid top-line growth in the fourth quarter. The Zacks Consensus Estimate for revenues is pegged at $1.08 billion, implying 14.2% year over year growth. The consensus estimate for earnings stands at 45 cents, reflecting a 12.5% year-over-year increase.

However, we are apprehensive about Fastenal’s changes in product and customer mix that have been hurting the gross margin for quite some time now. Gross margin of 49.4% in the first nine months of 2017 dropped 10 bps from the prior-year quarter.

Also, foreign exchange headwinds may dampen prospects. Unfavorable currency impacted sales by 0.5% in October and 0.4% in November 2017.

Quantitative Model Prediction

Here is what our quantitative model predicts:

Fastenal has the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for Fastenal is +6.08%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Fastenal carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP.

Fastenal Company Price and EPS Surprise

Other Stocks to Consider

Here are some other companies in the Zacks Retail-Wholesale sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:

McDonald's Corporation (NYSE:MCD) has an Earnings ESP of +0.11% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is slated to release quarterly results on Jan 30.

Darden Restaurants, Inc. (NYSE:DRI) has an Earnings ESP of +0.73% and a Zacks Rank #1. The company is expected to release quarterly results on Jan 26.

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) has an Earnings ESP of +2.75% and a Zacks Rank #3. The company is expected to release quarterly results on Feb 20.

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