Fastenal: Despite gains, a mixed outlook

Fastenal Co., maker and retailer of construction supplies from nuts and bolts to tools and paint, posted strong gains in both sales and earnings for its third quarter Tuesday, but offered a mixed outlook on the prospects of a continuing economic recovery.

In a conference call, CEO Willard Oberton said a broad range of Fastenal's large manufacturing customers are telling him they're optimistic their businesses will continue to expand.

"It's not like on fire, but they are seeing strength in backlogs, they're adding people and they're actually looking for a very good 2011," Oberton said. The Winona-based company already has opened more new stores this year than in 2009 and said it expects to accelerate the rate of store openings in the coming year.

At the same time the company said "the duration of economic weakness" could delay its goal of reaching $125,000 in monthly average sales per store by 2012.

That uncertainty has been reflected in some recently reported benchmarks of manufacturing activity. Earlier this month the Institute for Supply Management reported that production, new orders and employment nationwide grew in September, but at their lowest monthly rates since April. A similar study of Midwest manufacturers also showed a diminishing rate of economic expansion and a decline in business confidence.

The company said sales to manufacturing customers, about 50 percent of its business, increased more than 30 percent in the third quarter. Large businesses were the primary drivers of the revenue gain, and many were new customers. That increase follows sales gains of 16 percent in the first quarter and 30 percent in the second quarter.

The company reported a 23 percent increase in total sales to $603.8 million. Earnings for the period ended Sept. 30 jumped 58 percent to $75 million, or 51 cents a share. The results topped analysts' estimates of $595.5 million in revenue and earnings per share of 50 cents.

In a research note Samuel Darkatsh, an analyst at Raymond James in New York, kept his 2010 earnings-per-share estimate at $1.80, up from $1.24 for 2009. But he cautioned that Fastenal's organic sales growth, which doesn't include price increases or contributions from new stores, is likely to slow down by the end of this year.

Sales to nonresidential construction customers, which typically account for 20 to 25 percent of total revenue, rose about 6 percent. It was the second consecutive quarter sales have risen in the business segment, which saw revenue fall nearly 20 percent in 2009.

Oberton said the company isn't banking on a rebound in retail construction to fuel its construction-related sales. "They aren't putting up Home Depots and Targets by the hundreds today," he said. Instead, most projects are likely to be in the infrastructure and energy areas.

McGraw-Hill Construction recently reported that increased construction of public works and utilities continues to be offset by declines in residential and other nonresidential building. For the first eight months of 2010, total construction on an unadjusted basis came in at $277.7 billion, down 4 percent from the same period a year ago.