Over the past five years, Fastenal (Nasdaq:FAST), which literally provides the nuts and bolts to a diverse industrial customer base, has posted double-digit sales and profit growth. This trend has rapidly reversed course as client demand has come crashing down and is also wreaking havoc on the company’s share price valuation.
Third-quarter sales fell 21.7%, to $489.3 million. Management cited continued weakness in sales to its industrial production clients and more recent struggles in the non-residential construction business. Fastenal serves the manufacturing and construction industries and likely serves companies such as Jacobs Engineering (NYSE:JEC) and Chicago Bridge & Iron (NYSE:CBI). During its most recent full fiscal year, Fastenal detailed approximately 344,000 active customer accounts.
A large part of Fastenal’s growth in recent years has stemmed from the opening of new stores. Given the current challenges of its customer base, it will slow openings to 2-5% for the remainder of 2009. A more recent strategy has been to hire outside sales staff to bring more sales into existing stores. Again, given the current state of the market, Fastenal has frozen hiring of new employees.
Cost of sales fell 16.8% to lag the decrease in the top line as lower commodity costs and other expense efficiencies proved unable to offset deflation in selling prices given the dramatic decline in demand from end customers. Operating and administrative expenses fell 21.2% from the previous quarter to nearly match the drop in sales as sales commissions, bonuses and hours worked all fell. This culminated into a 35% fall in operating income to $76.4 million and 34.7% drop in earnings to 32 cents per diluted share. This came in a penny below analyst projections.
Fastenal didn’t provide sales or earnings guidance. Analysts currently project a full-year sales decline of 17.9%, to $1.92 billion and earnings of $1.25 per share, which represents a 33.5% year-over-year decline.
The Bottom Line
In other words, the bottom line will likely fall to levels last seen in 2006, or before tangible signs of the current plummet in industrial and construction activity were visible. At a current share price just under $40, the forward P/E is quite rich at more than 30 times. Fastenal is quickly ramping down capital expenditure, which will boost free cash flow generation. However, free cash flow per share will still only hover around $1 a share, doing little to garner interest from those looking for an appealing multiple with which to buy the stock. Rivals including W.W. Grainger (NYSE:GWW) and Thomas & Betts (NYSE:TNB) look much more appealing at mid-teens multiples off forward earnings, though both are expected to also experience double-digit sales declines and murky profit trends. (For more, see 5 Must-Have Metrics For Value Investors.)