Unlock: Fastenal (FAST) Trade Idea
Sector: Industrial Machinery & Equipment
Current Price: $42.33
Target: $38.00 to $40.00
Stop Loss: $43.50
Time Duration: 40 Days
Trade Idea: Buy FAST August 42 puts for $1.30 or less.
Please note this is strictly an earnings play. Fastenal will be reporting earnings on Tuesday, July 14, before market opens. Fastenal reports Net Sales every month, giving good visibility as to how the quarter is shaping up and here is how it looks:
Notice how monthly sales year over year were climbing through out 2014. It peaked in September 2014 at +18% growth and have been sharply decelerating since. May 2015 monthly sales report showed only +0.3% YoY growth rate, the lowest in several years. The biggest reason is major exposure to oil and gas business, partially offset by residential and commercial construction spending. As sales growth decelerates, gross margins come under pressure and in Q1 we saw 40bps YoY decline. We expect Q2 earnings will show more pressure. However, despite these concerns, the consensus on the street is looking for +5.7% Sales growth in 2015 and EPS of $1.83 representing 10.2% YoY growth.
We believe the consensus is too high and needs to come down for several reasons: 1) management is worried about secular decline in gross margins, 2) last quarter negative pricing observed in fasteners business, 3) sharp slowdown in manufacturing and non-residential construction end customer market as shown in this chart from Credit Suisse:
At the start of 2015, full year EPS estimate stood at $1.91. Now at $1.83, we believe these estimates will come down towards $1.60 gradually by the end of year. We also believe without meaningful rebound in crude oil and rig count, the consensus view of $2.03 EPS in FY2016 will not materialize. There is a decent chance the management will cut guidance on Tuesday as anemic May Net Sales of +0.3% suggests. Note the short interest float at the start of 2015 was 32.2M shares, now at 38.9M and climbing each week. Current short interest is at 13.9%. While the stock has been rather stable since March, shorts continue to build a position.