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To: Johnny Canuck who wrote (46212)	7/13/2010 2:36:53 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 70349

Fastenal's Drop On Hefty Earnings Gain Is No Reason To Buy July 13, 2010 - 12:39 pm Share Ned DouthatBio \| Email Ned Douthat is Chief Equity Analyst at Ockham Research and Editor of The Enterprising Investor's Guide weekly market commentary newsletter and a free blog entitled The Razor's Edge. Fastenal reported second quarter earnings of 47 cents per share on revenue of $571 million, which topped analysts’ forecasts of 44 cents on sales of $568.7 million. In addition to topping Wall Street’s expectations, the company also easily exceeded last year’s second quarter results of 29 cents per share in earnings with revenue growth of 20% since that period. The maker of nuts, bolts and other fastening devices and equipment saw net income rise 59%, but comparisons are still quite favorable as business fell off sharply during the recession. Demand from both manufacturing and non-residential customers improved in the quarter, which is a welcome sign after a long streak of declines. Fastenal’s gains in non-residential construction, while modest (up 0.5%), showed the first increase in more than a year. Prompted by the stronger than expected rebound in demand, the company said it plans to open 80 to 95 new stores during the second half of the year in hopes of being prepared to take advantage of continued improvements in the construction sector. The company declined to update guidance for the rest of the year, but at least earnings are trending the right way. The company has now topped analysts’ expectations after missing them in each quarter of fiscal 2009. With Fastenal showing positive momentum and topping expectations it might surprise some that the stock is actually trading 3% lower on heavy volume, especially considering the rest of the market is roaring higher. At Ockham, we became concerned about Fastenal’s valuation in mid-April as the stock reached a new 52-week high at nearly $57. It was at that time that we downgraded FAST to Overvalued and have maintained that stance ever since. The stock is very near the high end of its historically normal ranges of both price-to-cash earnings and price-to-sales, which suggests the market has already priced in quite a bit of fundamental improvement. For example, historically FAST has traded between 21x and 35x times cash earnings per share, and Fastenal closed yesterday trading for a multiple of 31x. Similarly, with price-to-sales per share around 3.5x, it is near the historical high end of the range at 2.2x to 3.6x. While Fastenal is clearly experiencing fundamental improvement and starting to see growth return, it is clear to us that some of that has already been priced in. At Ockham, we are value-oriented and try to find stocks that are fundamentally strong and appear priced attractive compared to historical norms. The stock has appreciated 63% over the last twelve months, and we think value investors should look elsewhere for ways to play a recovery in construction and manufacturing. Did you buy BIDU @ $8? Oberweis Report subscribers did. What now? Click here for the model portfolio with 4 new buys. [Johnny: FAST is usually a good surrogate for underlying industrial demand. The lack of positive movement in the stock may demonstrate a trend talked about by one analyse that expected that great results were already priced in and the spectacular forward guidance is needed to confirm a double dip is not coming. Watching CPG.TO and MRVL in the event the indication are not for a double dip. CPG.TO is a Balkan oil play that pays a dividend that will head back to new highs if the price of oil rises. MRVL is a play on increase consumer demand for electronics. It could potentially benefit from tablet PC demand. These two are lagging the bounce, but will have more to go if the direction of the economy is confirmed. The early movers won't have as much upside.]