Fastenal Earnings: We Raise Our Fair Value Slightly to $47, as Fastenal’s Earnings Show Resilience

Fastenal’s FAST first-quarter earnings were in line with our expectations. Overall, industrial markets continued to soften, leading to slowing sales growth for Fastenal in the quarter. Management called out slowing activity in the fasteners vertical, which serves original equipment manufacturers. The company’s top line increased roughly 9% year on year. Sequentially, sales growth has continued to moderate each quarter since the second quarter of 2022 (posted high-teens growth). That said, Fastenal has done a good job managing costs. The company’s operating margin came in at 21.2% for the quarter, 20 basis points above the year-ago period. Looking back over the past four years, we see that Fastenal’s current operating margin continues to sit near the high end.

We’re not expecting the near-term demand environment to change much, therefore we’re leaving our sales and margin forecasts unchanged. Over the balance of this year, we expect sales growth to continue moderating, likely growing by a mid-single-digit percentage. In 2023, we’re expecting sales to increase by 6% year on year, while operating margins tick down slightly by 20 basis points to 20.6%, as price increases will become less frequent in a slowing demand environment. Our fair value estimate increased slightly to $47, from $46.50 previously, mainly due to the time value of money since our last update.

We continue to view Fastenal’s stock as fairly valued. In our view, the high-quality distributor rarely trades at a discount. For us to get bullish on the stock, we’d like to see Fastenal expand more into on-sites. Today, on-sites account for 35% of sales compared with 10% of sales in 2014. Interestingly, on-sites present an opportunity for Fastenal to drive greater SG&A leverage in its business, which could present more margin upside.