Economy Hampers Fastenal Results

The Fastenal Company (FAST - Snapshot Report) of Winona, MN reported a drop in earnings to $47.6 million or 32 cents per share in the third quarter of 2009, from $72.9 million or 49 cents in the prior-year quarter. However, the company has managed to meet the Zacks Consensus Estimate. Net sales for the quarter declined 22% to $489.3 million.

Fastenal blamed the weak economy for the fall in earnings and sales. Economic conditions negatively affected sales in the industrial production business (business where the company supplies products that become part of the finished goods produced by others) and non-residential construction business.

Sales to manufacturing customers (constitutes 50% of sales) contracted approximately 23% on a year-over-year basis. Meanwhile, sales in the non-residential construction business (constitutes 20% to 25% of sales) contracted about 25%.

During the first nine months of 2009 Fastenal opened 45 new stores, compared to 140 new stores in the first nine months of 2008. The slowdown in store openings suggested the company’s attempt to balance long-term opportunities for growth with the necessary short-term reactions to its current realities. The company slowed its store openings to a range of 2% to 5% new stores for 2009. It also stopped adding any headcount except for store openings and for stores that are growing.

Financial Position

In the first nine months of 2009, Fastenal generated $253.2 million (or 181.1% of net earnings) of operating cash flow compared to $173.7 million (or 80% of net earnings) in the prior-year period. This strong free cash flow allowed the company to increase its second dividend payment (declared July 2009 and paid in August 2009) by 37% to 37 cents per share in 2009 from 27 cents per share in 2008.

As planned, Fastenal’s capital expenditures for the first nine months of 2009 went down to $40.1 million from $79 million in the comparable period of 2008. This was primarily related to the Indianapolis, IN distribution expansion and to the company’s new distribution center, located near Dallas, TX. The company expects its capital expenditures to dip from $95 million in 2008 to $65 million in 2009.

We recommend the shares of Fastenal as Neutral.