Fastenal Shrugs Off Economic Slowdown

Jul.13.12 | About: Fastenal Company (FAST)

Industrial distributor Fastenal (FAST) reported a strong second quarter Thursday morning. Revenue grew almost 14% for the quarter, and earnings per share grew 18.8% to $0.38, which was a penny north of expectations. The firm's gross margin did fall 60 basis points to 51.6%, but the firm successfully controlled costs and increased its operating margin by 80 basis points to 22.2%.

CEO William Oberton sounded rather cautious on the company's conference call, but he did seem assured that businesses aren't yet panicking. In his words:

"Manufacturing has slowed, that's clear. But on a very positive note, I've been off talking to lot of our regional people and district people and we have not seen a lot of abrupt changes. It's more of a step down and we haven't seen a lot of panic from our customers, so we think although it's much slower, so much slower than it was, it doesn't appear to be a lot of panic going on, so that gives us some optimism for the next several months."

Since the company has 2,635 stores and over 13,000 industrial vending machines, mostly in the United States, we feel like the firm has a pretty good gauge on industrial demand. Fastenal believes the US economy isn't growing at a rapid pace, but that it's not doing terrible either. Rather than selling a narrative, Fastenal is a firm focused on presenting its investors with complete transparency, so we take the firm's opinion very seriously. Though it looks like growth certainly slowed in May, it reaccelerated in June. The firm also has opened 53 stores year-to-date, 74% of which are in the United States.

Oberton also noted that construction has slowed, but that the firm is having a difficult time determining whether that is an actual trend or due to wild weather fluctuations. Weather was so warm throughout the winter and early spring that construction projects were actually pulled forward. Plus, in several regions of the United States, the weather has been hot enough to make construction dangerous and severely impair productivity.

Although we think Fastenal has a fantastic business model and is executing incredibly well, we aren't big fans of the company at its current valuation. The company has done a tremendous job of earning high returns on invested capital, and it sports a debt-free balance sheet. Yet, we think shares are trading near the high end of the firm's intrinsic value range (click here for report). Therefore, we'd be much more interested in Fastenal if shares pulled back.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.