Could Fastenal Be The Nuts & Bolts Of Your Portfolio?

Fastenal Co. FAST reported second quarter earnings this morning that beat Wall Street expectations, which could be a good sign for the manufacturing sector this earnings season. Fastenal, based in Minnesota, touches nearly every segment of the manufacturing sector with its nuts, bolts and fasteners. The company reported quarterly earnings of 32 cents per share on $710.73 million in revenues, compared to Wall Street estimates of 30 cents per share on $688.58 million in revenues. This is up sharply from last year, when the company reported quarterly earnings of 23 cents per share on $571.1 million in revenues. The company says it opened 75 new stores in the first half of 2011. The company's balance sheet is in solid shape, with the company finally declaring a dividend last quarter, and continuing that this quarter, 13 cents per share per quarter. In addition, the company has 1.8 million shares left in a repurchase program of 4 million shares. The company did not purchase any shares in 2010 or in the first half of 2011, so it is unlikely that the company will foolishly waste its money on shares it does not deem to be undervalued. So is Fastenal going to ratchet down your portfolio and provide growth? Shares are trading at 25 times forward earnings, not cheap, but not overvalued for a company growing revenues at 24% year over year, and earnings growth of 40% year-over-year. Shares have returned 37% over the past 52 weeks, solidly outpacing the 22% return of the S&P 500. It looks as if Fastenal may be fairly valued at these levels, and investors should listen to the earnings call to see what the company's plans for the future are. ACTION ITEMS:

Bullish:
Traders who believe that Fastenal, a key gauge for the U.S. manufacturing sector will prove bullish for the rest of the sector might want to consider the following trades:

• Going long names such as W.W. Grainger, Inc. GWW could prove to be profitable. Grainger is trading at 16 times forward earnings.

• Another name which may benefit is Cummins CMI, which builds engines, may benefit from strong results at Fastenal.

• A name like Caterpillar CAT could also do well, as Caterpillar is also one of the main gauges in the U.S. manufacturing sector.

Bearish:
Traders who believe that the U.S. manufacturing sector is going to weaken may consider an alternate positions:

• Shorting the above mentioned names could prove to be profitable, especially if ISM and Chicago PMI come in weaker than expected for July.

• Shorting the Industrial SPDR ETF XLI could also prove to be profitable, especially if the U.S. manufacturing sector falters.

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