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, Fastenal’s 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 EnlargeAfter 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.