FAST Fastenal Company

Earnings Preview 4/8/11

The first quarter earnings season “officially” gets underway next week when Alcoa (AA) reports, but it will be a slow start. A total of just 50 firms are due to report. However, eleven of those are members of the S&P 500.

The fourth quarter earnings season was a strong one, and this week should start to provide clues if that will be true for the first quarter as well. While few in number, some of the firms that are reporting are very significant ones, and they represent an interesting cross section of the economy. In addition to Alcoa, the firms reporting next week include: Bank of America (BAC), Google (GOOG), J.P. Morgan (JPM), Mattel (MAT) and Hasbro (HAS).

One relatively obscure firm whose earnings are particularly noteworthy is Fastenal (FAST), because as the premier maker of fasteners, like bolts and screws, which go into a multitude of other products, it is a good barometer of the overall health of the economy.

The earnings reports will be few but significant. The economic reports will be both frequent AND significant. We start out with data on both deficits, trade and budget. It is appropriate that the budget deficit data comes out the same week as tax day which finishes up the week.

The end of the week will also bring the CPI and data on Industrial Production and Capacity Utilization. We will also get the retail sales and PPI data next week, along with a Fed Beige Book. This schedule is based on the presumption that there will be no government shutdown. If there is one, many of these reports will be delayed until it is over.

Monday

• Nothing of particular significance.

Tuesday

• The Trade deficit is expected to have increased to $45.7 billion in March from $46.3 billion in February. That is very bad news since a rising trade deficit slows economic growth. Most of the increase is likely to have come from higher oil prices. The non-oil trade deficit probably declined due to the effects of a weaker dollar. Oil, however, is responsible for more than half of our total trade deficit, and higher oil prices mean a higher trade deficit. It is the trade deficit, not the budget deficit, that is responsible for our increasing indebtedness to the rest of the world and is a much more serious economic problem, particularly in the short term.
• The Budget deficit is expected to have jumped to $189.0 billion in February from $65.4 billion a year ago. The budget deficit numbers are extremely seasonal, but are not seasonally adjusted. Thus month to month comparisons are worse than useless. Much of the increase will be attributable to the deal in the lame duck session that continued the high end of the Bush tax cuts and also cut payroll taxes by 2% this year.

Wednesday

• Retail Sales are expected to have increased by 0.5% (seasonally adjusted) in March after rising 1.0%% in February. This is a broad measure of retail sales, not just activity at the malls. Most significantly, it includes auto sales, which while recovering, were weaker in March than they were in February. Excluding autos, retail sales are expected to have been up 0.7% after rising 0.7% in February. While the numbers are adjusted for seasonal variations like the number of shopping days, they are not adjusted for inflation. As such, some of the “strength” in retail sales will probably come from gas stations, and not due to a sudden rise in the number of people eating hot dogs off the rollers and drinking 44oz fountain drinks.
• The Federal Reserve’s Beige Book is due out. It is a collection of mostly anecdotal information from each of the 12 Federal Reserve Districts across the country. It is likely to conclude that the economy is still expanding at a moderate pace, but might warn of pricing pressures from higher commodity prices, especially for energy.
• Business Inventories are expected to have increased by 0.9% in March, matching the February rise. In the fourth quarter, inventory liquidation significantly slowed economic growth, and it looks like that is likely to reverse in the first quarter. While that will help the headline growth number, growth that comes from inventory gains are very low quality.

Thursday

• Weekly initial claims for unemployment insurance come out. After being extremely erratic over the holidays, they have started to fall significantly, but are still bouncing around a bit. Last week they fell by 10,000 to 382,000, but only after a big upward revision to the previous week. I would expect the downward trend in claims to continue next week. The consensus is looking for initial claims to remain rise slightly to 385,000. We may have another situation where last week is revised higher, but the current week falls. A level of 385,000 seems pretty good compared to the experience of the last few years. After a huge downtrend from mid-April through the end of 2009, initial claims were locked in a tight “trading range” for most of 2010. We now appear to have broken out of that trading range to the downside. This could well indicate that the economy is about to start producing a significant number of new jobs. The four-week moving average (which smooths out the week to week noise) was under the 400,000 for the sixth week in a row. Historically that has been an inflection point at which the economy starts to add significant numbers of jobs.
• Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 9,000 to 3.723 million. That is down 906,000 from a year ago. I would expect a further decline this week. The consensus is looking for a level of 3.700 million. Some of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks.  Those, however, don’t last forever either. Federally paid extended claims fell by 91,000 to 4.271 million, and are down by 1.467 million over the last year. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 8.524 million, which is down 296,000 from last week (there are some timing issues so the change in continuing and existing claims does not exactly match the change in the total). The total number of people getting benefits is now 2.543 million below year ago levels. What is not known is how many people have left the extended claims via the road to prosperity, finding a new job, and how many have left on the road to poverty, having simply exhausted even the extended benefits. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• The Producer Price Index (PPI) is expected to have increased by 1.0% in March, down from the 1.6% increase it posted in February. Most of the increases are likely to come from higher food and especially energy prices. Stripping out those volatile components and the increase is expected to be only 0.2%, matching a 0.2% increase last month. Those numbers are for finished goods. The report also includes data on prices further up the production chain. Most likely the increases at the intermediate and crude levels of production will be higher, indicating potential price pressures down the road. Inflation has generally been higher at the producer level than at the consumer level. In theory, that should indicate some pressure on corporate profit margins, but so far we have seen very little evidence of this happening as net margins continue to rise dramatically. The rapid rise in productivity and falling unit labor costs have more than offset rising input costs.

Friday

• We get what I think is one of the most important reports of the week, Industrial Production and Capacity Utilization. Industrial production is expected to have increased by 0.6% in March, after it declined 0.1% in February. The headline number can sometimes be distorted by the weather, as it includes the output of Utilities. It is thus best to look at what is happening in just manufacturing output as well as the overall number. In February, manufacturing output was up 0.4%.  Capacity Utilization can suffer from the same weather related problems that Industrial Production can. Still, it is a very good gauge of the economy, particularly if one just looks at factory utilization. Since the end of the recession, capacity utilization has staged a dramatic comeback, but that is from disastrously low levels. It is expected to come in at 77.4%, up from the 76.3% level in February (overall, factory only consistently runs slightly below the overall number) is about as low as we got at the bottom of most recessions prior to the Great Recession. There is no consensus estimate for just manufacturing capacity utilization, but last month it rose to 74.3% from 74.1% in January. I would expect continuing slow progress on that front, probably around 74.6%. It indicates that there is still very significant slack in the economy and provides the green light to the Fed to keep the Fed Funds rate pegged at zero and to fully implement the $600 billion QE2 program.
• The Consumer Price Index (CPI) is expected to rise by 0.3% in March, down from a 0.5% January rise. Inflation has been very tame over the last year. Most of the rise is expected to come from the volatile food and energy components of the index. Stripping them out to get to the core CPI, the increase is expected to be only 0.2%, matching a 0.2% rise in January. Rent and Owners Equivalent Rent together make up over 30% of the overall CPI and more than 40% of core CPI and are likely to be either unchanged or up just 0.1% as they have been for the last year or so, thus keeping the overall increase in inflation very low. Inflation, particularly core inflation, is not a significant economic problem at this point. Efforts to combat it aggressively are misguided, since those measures will tend to make real economic problems, like unemployment, much worse.
• The University of Michigan Consumer sentiment index is expected to dip to 66.0 from 67.5. That is well off the bottom, but we probably need to see it get much closer to 90 to indicate the economy is back to being healthy. I am not a big fan of this number, or the related Consumer Confidence number. With the Consumer representing over 70% of the economy, theoretically these numbers should be vital. The problem is that what consumers say in these surveys, and what they subsequently do, are often very different.
• The Empire State Index is likely to fall slightly from its February level of 17.5 to about 15.0. It is sort of a mini-ISM, just covering New York State, only with zero as the dividing line between expansion and contraction. Thus the economy is expected to continue to expand in NY but at a slower pace than last month.
• Tax day, get them done, or file for the extension.

In the Earnings calendar below, $999.00 should be read as N.A.

Earnings Calendar

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
ALCOA INC	AA	201103	$0.27	$0.10	10.53	20110411	AMC	$18.12
CHEMSPEC INTL	CPC	201103	$0.19	$0.21	26.09	20110411	BTO	$7.37
JOES JEANS INC	JOEZ	201102	$0.00	$0.01	0	20110411	AMC	$1.12
SHAW GROUP INC	SHAW	201102	$0.47	$0.49	85.71	20110411	BTO	$34.90
FASTENAL	FAST	201103	$0.51	$0.38	-2.22	20110412	BTO	$67.82
MISTRAS GROUP	MG	201102	$0.09	$0.03	31.25	20110412	AMC	$16.65
ADTRAN INC	ADTN	201103	$0.46	$0.29	27.27	20110413	BTO	$41.57
ASML HOLDING NV	ASML	201103	$1.11	$0.33	26.53	20110413	BTO	$42.84
BANK OZARKS	OZRK	201103	$0.69	$0.59	5.88	20110413	AMC	$44.87
DHT HOLDINGS	DHT	201103	$0.10	$0.05	0	20110413	AMC	$4.84
DRAGONWAVE INC	DRWI	201102	($0.16)	$0.34	100	20110413	AMC	$8.35
FLANDERS CORP	FLDR	201103	$0.06	$0.00	14.29	20110413	BTO	$3.25
HEALTHCARE SERV	HCSG	201103	$0.14	$0.11	-6.67	20110413	AMC	$18.02
HOOKER FURNITUR	HOFT	201101	$0.14	$0.31	-26.67	20110413		$13.03
IGATE CORP	IGTE	201103	$0.26	$0.20	19.23	20110413	BTO	$18.69
JPMORGAN CHASE	JPM	201103	$1.17	$0.74	12	20110413	BTO	$47.40
NORTHERN TECH	NTIC	201102	$0.21	$0.08	10.53	20110413	BTO	$15.39
NOVAGOLD RSRCS	NG	201102	($0.07)	($0.10)	-62.5	20110413	BTO	$13.40
PACIFIC CONTL	PCBK	201103	$0.08	$0.06	-30	20110413	AMC	$10.17
SHAW COMMS-CL B	SJR	201102	$0.38	$0.30	9.09	20110413	BTO	$21.45
UNIVL FST PRODS	UFPI	201103	$0.01	$0.06	-500	20110413	AMC	$37.06
CHECK PT SOFTW	CHKP	201103	$0.58	$0.51	6.15	20110414	BTO	$51.62
CHEROKEE INC	CHKE	201101	$0.39	$0.35	-27.78	20110414	AMC	$17.93
CHRISTOPHER&BNK	CBK	201102	($0.48)	($0.13)	100	20110414	AMC	$6.33
COMMERCE BANCSH	CBSH	201103	$0.65	$0.50	17.91	20110414		$41.41
CUBIST PHARM	CBST	201103	$0.27	$0.34	26.47	20110414	AMC	$30.60
DATALINK CORP	DTLK	201103	$0.09	($0.01)	15.79	20110414	AMC	$6.27
FAIRCHILD SEMI	FCS	201103	$0.36	$0.25	15.38	20110414	BTO	$18.85
GOOGLE INC-CL A	GOOG	201103	$7.17	$6.06	9.08	20110414	AMC	$580.00
HASBRO INC	HAS	201103	$0.17	$0.26	5.32	20110414	BTO	$47.29
HUNT (JB) TRANS	JBHT	201103	$0.38	$0.29	2.22	20110414	AMC	$45.78
INDEP BK MASS	INDB	201103	$0.49	$0.44	5.66	20110414	AMC	$27.74
INFOSYS TEC-ADR	INFY	201103	$0.70	$0.60	4.55	20110414	AMC	$73.27
KAYNE ANDSN EGY	KED	201102	$0.30	($0.77)	-127.03	20110414	AMC	$19.80
MEDTOX SCIENTIF	MTOX	201103	$0.08	$0.01	0	20110414	BTO	$16.03
MISSION WEST	MSW	201103	$0.11	$0.16	-15.38	20110414		$6.47
PROGRESSIVE COR	PGR	201103	$0.43	$0.44	25	20110414	BTO	$21.23
PROSPERITY BCSH	PRSP	201103	$0.69	$0.66	2.94	20110414	BTO	$43.83
SOKO FITNESS&SP	SOKF	201102	$0.14	$0.15	7.14	20110414	BTO	$4.05
SUPERVALU INC	SVU	201102	$0.34	$0.61	-22.58	20110414	BTO	$9.07
TITAN MACHINERY	TITN	201101	$0.36	$0.19	16.67	20110414	BTO	$26.81
VALMONT INDS	VMI	201103	$0.95	$0.62	16.81	20110414	AMC	$104.79
ZOO ENTERTMNT	ZOOG	201103	$0.10	$0.10	33.33	20110414	AMC	$5.25
BANK OF AMER CP	BAC	201103	$0.28	$0.28	-78.95	20110415	BTO	$13.61
GENUINE PARTS	GPC	201103	$0.75	$0.63	7.14	20110415	BTO	$53.88
KNOLL INC	KNL	201103	$0.20	$0.10	18.18	20110415	BTO	$21.39
MATTEL INC	MAT	201103	$0.05	$0.07	3.49	20110415	BTO	$25.64
SCHWAB(CHAS)	SCHW	201103	$0.19	$0.10	0	20110415	BTO	$18.47
WEBSTER FINL CP	WBS	201103	$0.29	($0.08)	50	20110415	BTO	$21.63

 
ALCOA INC (AA): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
FASTENAL (FAST): Free Stock Analysis Report
 
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
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