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Fastenal Co. (FAST - Analyst Report), one of the leading distributors/retailers of industrial and construction supplies, is set to unveil its third quarter 2012 results on October 11, 2012, before the market opens. The Zacks Consensus Estimate for third quarter earnings is 37 cents a share on revenues of $804 million.

Second Quarter 2012 Recap

Fastenal Company reported diluted earnings of 38 cents a share in the second quarter of 2012, up 18.8% year over year on the back of top-line growth, offset by margin declines. The company’s earnings barely beat the Zacks Consensus Estimate by a penny.

The company reported net sales of $805 million in the second quarter of 2012, up 14.7% over the prior-year quarter. Total revenue, however, fell short of the Zacks Consensus Estimate of $806 million, mainly due to a slowdown in sales to manufacturing customers. Daily sales growth rates declined sharply in the quarter due to end market slowdown as well as foreign currency headwinds. Daily sales growth rates stood at 17.3%, 13.1% and 14.0%, respectively, for the months of April, May and June, significantly down from the daily growth rates in the corresponding prior-year months.

Agreement of Estimate Revisions    

None of the 9 estimates for the third quarter of 2012 were revised in the last 7 days.  However, over the last 30 days, 2 out of the 9 estimates were lowered.

Similarly, in the last 7 days, none of the 10 estimates for the full year 2012 were revised.  However, over the last 30 days, 3 out of the 10 estimates were revised downward for the full year 2012.

The non residential construction market is sluggish, with a single-digit growth rate. The company is already under a lot of pressure and the lack of significant activity in the construction market will further impact its performance. This might have pushed some of the estimates downward as well.

Magnitude of Estimate Revisions

Given the limited estimate revisions, the Zacks Consensus Estimate for the third quarter of fiscal 2012 has remained static over the last 7 days at earnings of 37 cents a share. However, the estimate has declined by a penny from 38 cents over the last 30 days.

The Zacks Consensus Estimate for fiscal 2012 has remained static over the last 7 and 30 days at earnings of $1.44 per share.

Surprise History

Fastenal’s results have been in line with the Zacks Consensus Estimate in three out of the four preceding quarters, beating the estimate once in the second quarter of 2012.  On an average, the earnings surprise was 2.70% in the trailing four quarters.

Our Recommendation

The extremely sluggish economy is taking a toll on the company's business and we do not see the situation improving in the next few months. Moreover, Fastenal’s  ‘pathway to profit’ strategy has failed to achieve its desired results Other than that, the company’s strategy of  new store openings significantly hurt near-term profitability due to the start-up costs involved.

We currently have ‘Underperform’ recommendation on Fastenal in the long term. The stock carries a Zacks #4Rank (a short-term ‘Sell’ rating). On the other hand, we have long term recommendation of ‘Neutral’ on The Home Depot Inc. (HD - Analyst Report) one of the largest home improvement retailers. The stock carries a Zacks #2 Rank (a short-term ‘Buy’ rating).

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