Analyst Note| Brian Bernard, CFA, CPA |
We've maintained our $39 fair value estimate for wide-moat-rated Fastenal after reviewing the firm's third-quarter results. Supply chain disruptions and inflation have become increasingly problematic for our North American industrials coverage. However, based on Fastenal's headline third-quarter results, it wasn't abundantly obvious that the firm has been grappling with these issues, although it certainly has. We say this because Fastenal reported a 10% year-over-year increase in revenue (fasteners sales were up 20%), and its 20.5% operating margin was in line with the third quarter of 2020 and 10 basis points better than the third quarter of 2019. Selling, general, and administrative expenses were higher than we had anticipated, but so was the gross profit margin, and the operating margin met our expectations. Fastenal has been raising prices to defend its gross profit margin, and management estimates higher prices accounted for over 2% of sales growth during the quarter. Fastenal was able to maintain about neutral price/cost as higher selling prices were absorbed by higher product costs (especially fasteners) and transportation costs (most acute with ocean freight). In our view, Fastenal's ability to maintain profitability through these headwinds is a testament to the firm's strong competitive advantages underpinning its wide moat and excellent management team.