Fastenal Confirms Continuing Weakness in Non-Residential Construction

Fastenal (FAST) is a $5.8B market cap industrial company that supplies components and parts for construction and manufacturing. FAST reported earnings yesterday that again confirmed a recurring theme of weakness in non-residential construction. This area has often been called “the next shoe to drop” that will presage further weakness in the economy. This drop has yet to show up anywhere in the stock market, but it continues to show itself in the earnings reports of companies that do business in this sector.

Not surprisingly, FAST reported weak results for the previous quarter (click here for the detailed earnings report):

“As we saw in the previous three quarters, 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, more recently, our non-residential construction business. To place this in perspective — sales to our manufacturing customers (historically approximately 50% of sales) contracted approximately 23% in the third quarter versus the same quarter in the prior year. 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 25% versus the prior year. The remaining business (sales to other resellers, government business, other industries, and in-store retail sales) is producing better results, but unfortunately, doesn’t have enough impact to offset the manufacturing and construction impact.”

However, FAST’s business is slowly but surely regaining its footing given the sequential improvement the company has experienced in its manufacturing business since May:

“On a sequential basis, our daily average sales to our manufacturing customers has improved each month since May 2009 (with the exception of July 2009 due to the holiday impact) versus the previous month. This trend was the first sequential improvement since September 2008. However, this improvement was offset by continued weakening in our non-residential construction business.”

Notice that non-residential construction is now the main drag on FAST’s business. I strongly suspect that this will remain the case for some time. Examples of over-building and excess capacity abound in this sector like in the Atlanta, Buckhead area where there may be no need to build even one more cubicle for many years to come. Even the Federal Reserve has expressed concerns over the commercial real-estate (CRE) sector as recently as last month: “Banks in the U.S. “are slow” to take losses on their commercial real-estate loans being battered by slumping property values and rental payments…Banks will be slow to recognize the severity of the loss — just as they were in residential.” To date, the stock market has shown little concern or regard for these issues, but I think it remains a key concern and something to continue monitoring.

Be careful out there!

Full disclosure: no positions

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