Fastenal Earnings: Demand Outlook Remains Constructive, Despite Cooling Manufacturing Activity

Our $48 fair value estimate for Fastenal FAST remains unchanged following third-quarter earnings. The market sent shares nearly 8% higher following the earnings results. We believe the primary reason behind the positive stock reaction was better-than-expected margin performance. That said, we still view shares, which currently trade 25% above our fair value estimate, as overvalued.

Turning to the quarter, Fastenal’s daily sales growth continues to decelerate. Revenue grew by a mid-single-digit rate in the third quarter compared with a high-single-digit rate in the beginning of 2023. Fastener sales were down by 2% year on year, while safety supplies and remaining products were up 9.2% and 6.8%, respectively. Recall, the company’s fastener business is more cyclical, given its high exposure to OEM production. This customer segment makes up over 62% of fastener sales. Overall, we’re still confident Fastenal can grow sales by more than 5% in 2023. The company continues to make progress with vending and on-site signings.

The other takeaway from third-quarter earnings was the company’s margin resilience. Operating margin held steady at 21%, thanks to effective price/cost management. Freight costs can continue to come down, helping protect profitability. Still, we forecast operating margins to decline 10 basis points to 20.7% in 2023 due to price normalization.

Our demand outlook for Fastenal remains unchanged. Demand remains sluggish across most end markets, but the industrial distributor model allows for cash flow resiliency. Operating cash flow conversion was over 130% in the quarter, as slowing demand reduced working capital requirements. In addition, the company is holding less inventory on average (frees up cash), given supply chains are easing. This dynamic gives us comfort that Fastenal can still reinvest in the business, even if sluggish demand is around for longer. A key priority for the company is investing in on-sites and vending machines.