Fastenal Earnings: We Still Expect Sales and Earnings Growth in 2023, Despite Moderating Demand

Fastenal’s FAST second-quarter earnings showed continued trends of moderating demand across end markets. However, these trends do not deter us from expecting Fastenal to post positive sales and earnings growth in 2023. Management commented during the earnings call that customers continue to be cautious with respect to the economic environment. For us, the read-through here is that demand is slowing, but not to the level of a protracted downturn. This gives us confidence to project roughly mid-single-digit sales and earnings growth for Fastenal this year, which is notable given the midteens sales and earnings growth in 2022. We made no changes to our discounted cash flow model, but our fair value estimate did tick up by $1 to $48 due to the time value of money since our last update.

Fastenal’s stock was down nearly 3% in intraday trading following the earnings release. We believe investors are reacting to the challenging near-term demand environment. Even with the stock price decline, we still think the company’s shares are overvalued currently by approximately 19%. In our view, Fastenal is the top industrial distributor from a profitability standpoint. This dynamic often leads to the stock fetching a premium in the open market, by our estimates. We’d like to see a margin of safety develop in the stock before getting excited about valuation.

Overall, we like the direction management is taking the company. For example, we think the company’s focus on building out its digital capabilities will help draw in more unplanned procurement spending with end customers. Early evidence of this can be found in growing e-commerce sales. In addition, we like the progress Fastenal has made with its FMI technology, which caters to planned procurement spending. We expect these verticals to increasingly lock in more business for Fastenal, increasing market share gains.