Fastenal Still Reporting Weakness in Non-Residential Construction

Looking for signs of life in the commercial real-estate (CRE) business has now become an earnings season ritual for me. If construction activity serves as a leading indicator of CRE’s future health, then Fastenal’s report on fourth quarter and annual earnings demonstrates once again that CRE continues to deteriorate, not improve. Fastenal (FAST) reported “…continued weakening in our non-residential construction business.” The industrial production business provided the other main drag on FAST’s business. Here are some specifics (emphasis mine):

“As we saw in the previous twelve months, the weakened economy continues to have a substantial impact on our business. These impacts continue to negatively affect our sales, particularly related to our industrial production business (business where we supply products that become part of the finished goods produced by others) and, as the year progressed, our non-residential construction business. To place this in perspective — sales to our manufacturing customers (historically approximately 50% of sales) contracted approximately 10.1% in the fourth quarter and 18.8% for the year versus the same periods in 2008. This contraction is less severe in the maintenance portion of our manufacturing sales (business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing), but more severe in the production business. Our non-residential construction business (historically 20% to 25% of sales) contracted approximately 24.7% in the fourth quarter and 19.4% for the year versus the same periods in 2008.”

Overall, FAST remains confident about its business and ability to generate cash:

“Our balance sheet continues to be very strong and our operations have good cash generating characteristics…During 2009, we generated $306,071 (or 166.0% of net earnings) of operating cash flow; the comparable figure was $259,898 (or 92.9% of net earnings) in 2008.”

Optimism was strong running into earnings as FAST rode the wave of strong performance seen in many cyclical companies this year. FAST closed as high as 13% year-to-date before settling in for a 10% year-to-date gain as of Friday’s close. FAST initially dropped 5% on today’s earnings news, but, in typical fashion, the stock quickly recovered and closed the entire gap. This time around, I was able to catch the intra-day move. (At the time of writing, FAST has settled back down for a 2% loss).

Given the break-out in December from 14-month resistance (see weekly chart below captured one hour before today’s trading close), the benefit of the doubt goes to FAST. A successful test of that break-out point would make FAST an ideal candidate for a swing trade (long).

*Chart created using TeleChart:

Be careful out there!

Full disclosure: no positions