Fastenal's stock flies, but an earnings beat comes with a warning about demand trends

By Tomi Kilgore

CFO Lewis said feedback from regions point to 'sluggish demand' and cautious outlook for spending

Shares of Fastenal Co. powered higher Thursday toward the best levels seen in 18 months, after the fasteners and tools and janitorial supplies company beat third-quarter profit expectations, with daily sales rates breaking records in the past month.

But the upbeat results came with a caveat, that demand remained sluggish and weakness in manufacturing markets is intensifying.

The stock (FAST) shot up 6.6% in afternoon trading, enough to make it the biggest gainer among S&P 500 index SPX components, and to put it on track for the biggest one-day gain since it rallied 6.9% on March 26, 2020. It was also headed for the highest close since April 6, 2022.

Net income for the quarter to Sept. 30 rose to $295.5 million, or 52 a share, from $284.6 million, or 50 cents a share, in the same period a year ago. That beat the average analyst estimate compiled by FactSet of 50 cents a share.

Sales grew 2.4% to $1.85 billion, in line with the FactSet consensus.

Chief Executive Daniel Florness said on the post-earnings conference call with analysts that the daily-sales rate (DSR) broke the $30 million per day barrier for the first time in September.

But as Chief Financial Officer Holden Lewis explained on the call, while he was "encouraged" by the September DSR strength, it seemed to have more to do with easing comparisons in certain businesses than a clear signal of firming customer demand or brightening outlooks.

"Macro data points and feedback from the regional leadership continue to point to sluggish demand and a cautious outlook for spending and production," Lewis said, according to an AlphaSense transcript.

The difference in performance between its product lines, which includes fasteners, safety supplies and other products, such as tools, janitorial supplies and cutting tools, also warns of slowing of the manufacturing economy.

"We experienced increasing divergence in the performance of our fastener versus our non-fastener product lines in the third quarter of 2023," the company said in a statement, which it believes relates to two factors:

Fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to weaker manufacturing end markets.Pricing for fasteners has decelerated at a faster pace than non-fastener products.

The DSR change over the latest three-month period for fasteners was a decline of 2%, after being up 18.2% the year before. Meanwhile, the DSR change for safety supplies was up 9.2%, compared with a 12.4% increase a year ago, and the change for other products was up 6.8%, after being up 15.4% last year.

"We did experience very modest deflation within our fastener product line," Lewis said.

The company did not provide a full-year outlook for profit or sales. But despite the "sluggish" demand outlook, the FactSet consensus for 2023 sales has remained little changed at $7.34 billion since the end of July, while the EPS actually inched up a penny to $1.99.

The stock has tacked on 1.7% over the past three months, while the Industrial Select Sector SPDR ETF XLI has lost 6% and the S&P 500 index SPX has given up 2.8%.

-Tomi Kilgore

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10-12-23 1359ET

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