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On May 17, we maintained a Neutral recommendation on Fastenal Company (FAST - Analyst Report) following mixed first-quarter 2013 results. However, continuous weakness in its top line is disturbing.

Why the Neutral Recommendation?

This industrial and construction supplies company announced first-quarter 2013 results on Apr 10. Adjusted earnings of 37 cents per share were in line with the Zacks Consensus Estimate but grew 8.8% year over year, attributable to significant margin growth. Revenues however, grew only 4.9% and also missed the Zacks Consensus Estimate. The company continues to struggle with sales growth. Top-line growth was slower than company expectations in the quarter, hurt by one less selling day, soft fastener sales and global economic policy uncertainty.

Fastenal’s daily sales growth rates have been weak since the last 3 - 4 quarters mainly due to weakness in its fastener product line, which are being hurt by end-market slowdown and broader economic uncertainty. From more than 15% growth in the first quarter of 2012, the fastener product line, which accounts for more than 40% of company sales, dropped to 1.7% growth in the first quarter of 2013.

Estimates have mostly shown a downward trend after the announcement of first-quarter results. The Zacks Consensus Estimate for 2013 has gone down by 1.8% to $1.61 per share while that for 2014 has gone down by 2.1% to $1.87 over the last 60 days.

However, the strong gross margin improvement and easing comparisons ahead keep us optimistic. Despite an overall weak sales pattern, the company is seeing some progress around its vending program and is fast accelerating its vending contract signings and installations. We are also encouraged by Fastenal’s other growth drivers like government business and metalworking, which are gaining traction and could help achieve profitability in 2013 and beyond. We thus, remain on the sidelines on solid long-term fundamentals.

Other Stocks to Consider

Fastenal carries a Zacks Rank #4 (Sell). Some building product maker stocks that are worth a look include Lumber Liquidators Holdings, Inc. (LL - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy) and The Home Depot, Inc. (HD - Analyst Report) and Builders First Source, Inc. (BLDR - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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