Fastenal: Gross Margin Pressure Overshadows Sales Growt
We continue to expect the wide-moat industrial distributor's top line to grow at a faster pace in 2018 than it did in 2017.
Fastenal (FAST) shares sold off on April 11 after the wide-moat industrial distributor reported first-quarter sales and EPS that narrowly missed consensus expectations. We also believe investors were disappointed with Fastenal’s 70 basis point year-over-year gross margin decline, especially since peer MSC Industrial noted in its April 10 earnings call that better price realization ended its 14-quarter streak of year-over-year organic gross margin contraction. While Fastenal did note that an unfavorable price-cost spread for fasteners sold to local customers and higher freight costs contributed to gross margin pressure, sales mix and the recently acquired Mansco business also contributed to a lower gross margin versus the year-ago quarter. After reviewing Fastenal’s first-quarter results, we increased our fair value estimate to $53 per share from $52, which was primarily driven by the time value of money since our last update. The valuation impact of our higher sales growth and lower gross margin assumptions in 2018 were offsetting.
We continue to expect Fastenal’s top line to grow at a faster pace in 2018 than it did in 2017. The firm’s first-quarter sales grew a robust 13.2% (about 12% excluding Mansco) versus the year ago quarter. At this time last year, Fastenal’s sales were up about 6%. Lower-gross margin national accounts and non-fastener sales grew faster than the company average (up 17.3% and 14.5%, respectively), which, as noted above, weighed on Fastenal’s gross margin. Fastener sales increased 11.8% (8.1% excluding Mansco) year over year.
Fastenal’s industrial vending and onsite growth initiatives continued to gain traction during the quarter. The company signed 5,679 vending machines during the quarter (up 4.5% year over year) and now has an installed base of 73,561 machines versus 64,430 at the end of first quarter 2017. Fastenal also signed 100 new onsite locations and now has 678 active onsite locations versus 437 sites in the year-ago quarter.
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Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.