Fastenal (FAST) Vending Machine Count Grows, Margins Weak

Fastenal Company’s (NASDAQ:FAST) industrial vending process has the potential to revolutionize the industrial distribution system and boost profits. Industrial vending is one of the primary growth drivers for Fastenal which has the potential to drive sales and profits.

Sales through vending machines continued to grow at or near a double-digit pace in each of the first three quarters of 2017. Fastenal signed 15,089 vending machines in the first nine months of 2017, reflecting an increase of 5.5% from the year ago period.

Apart from vending machines, increased onsite locations have contributed significantly to sales. Fastenal provides onsite location, in which a mini-Fastenal shop is basically located in a customer’s plant.

The company signed 213 new onsite locations in the first nine months of 2017 and had 555 active sites as on Sep 30, 2017, reflecting a year-over-year increase of 47.6%. The company aims to achieve 275-300 onsite signings in 2017, compared with 176 in 2016 and 80 in 2015. Increased number of onsite locations is likely to boost Fastenal’s market share.

Additionally, Fastenal’s cost-saving program Pathway-to-Profit is encouraging. Under this, the company focuses on increasing the average store size which leads to better earnings. Notably, shares of Fastenal have gained 23% in the last six months, compared with 13% growth of its industry.

Concerns

Negative customer/product mix as a result of faster growth of lower margin national accounts and a lower proportion of higher margin fasteners are likely to affect results. The customer mix shifted toward the large-account end-market and the product mix shifted from high-margin fastener products to low-margin non-fastener products.

Gross margin of 49.4% in the first nine months of 2017 dropped 10 basis points (bps) from the prior-year period. Overall, 2016 gross margin dropped 80 bps from the 2015 level.

The company buys and sells various types of steel products, primarily consisting of different types of threaded fasteners. As such Fastenal is subjected to the impact of change in the price of steel. In the first nine months of 2017, the company saw a inflation in steel pricing.

Nevertheless, increased onsite locations and installation of vending machines along with the cost control initiatives are expected to boost growth. Notably, earnings estimates for 2018 moved up 0.5% over the last 30 days, reflecting analyst optimism.

Key Picks

A few better-ranked stocks in the sector are Beacon Roofing Supply, Inc. (NASDAQ:BECN) , Tecnoglass Inc. (NASDAQ:TGLS) and Famous Dave's of America, Inc. (NASDAQ:DAVE) .

Beacon Roofing sports a Zacks Rank #1 (Strong Buy), while the other companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beacon Roofing is likely to witness 41.3% earnings growth in fiscal 2018.

Tecnoglass is expected to see 30.2% growth in 2018 earnings.

Famous Dave's of America earnings estimate for fiscal 2018 improved from a loss of 6 cents to earnings of 6 cents.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>