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Fastenal (FAST) Research Report: Q1 CY2024 Update


Full Report / May 28, 2024

Industrial supplier Fastenal (NASDAQ:FAST) fell short of analysts' expectations in Q1 CY2024, with revenue up 1.9% year on year to $1.90 billion. Its non-GAAP profit of $0.52 per share was flat year on year.

Fastenal (FAST) Q1 CY2024 Highlights:

  • Revenue: $1.90 billion vs analyst estimates of $1.91 billion (small miss)
  • EPS (non-GAAP): $0.52 vs analyst expectations of $0.53 (2.3% miss)
  • Gross Margin (GAAP): 45.5%, in line with the same quarter last year
  • Free Cash Flow of $284.8 million, down 10.4% from the previous quarter
  • Sales Volumes rose 10.5% year on year
  • , in line with the same quarter last year
  • Market Capitalization: $37.8 billion

Founded in 1967, Fastenal (NASDAQ:FAST) provides industrial and construction supplies, including fasteners, tools, safety products, and many other product categories to businesses globally.

When it was started, the company first sold mostly fasteners such as screws, threaded rods, and nuts used in construction. Fastenal's offerings initially include both purchased and manufactured products. As the company expanded its product offering into more diverse areas of industrial and construction components, materials, tools, and services, Fastenal ceased manufacturing product and became solely a distributor.

Today, Fastenal’s product portfolio spans fasteners, motors, paints and painting supplies, hand and power tools, and many other categories. For customers such as manufacturing plants and contractors, time is money; the last thing they want is to buy different product categories from multiple suppliers and wait for those products. Fastenal addresses this pain point by carrying broad and reliable inventory as well as the capabilities to get those goods to their destination quickly. This maintains smooth operations by supplying essential components and tools, ensuring minimal downtime and optimal performance.

The primary revenue sources for Fastenal come from the sale of its products. To a smaller extent, the company also provides services such as inventory management that are more steady and predictable in nature. Fastenal goes to market through direct sales, an extensive branch network, and e-commerce capabilities.

Maintenance and Repair Distributors

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Competitors in the operating (MRO) supplies industry include W.W. Grainger (NYSE:GWW), MSC Industrial Direct (NYSE:MSM), and HD Supply (NASDAQ:HDS).

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Fastenal's 7.7% annualized revenue growth over the last five years was decent. This shows Fastenal was successful in expanding its business, a useful starting point for our quality assessment.

Fastenal Total Revenue

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Fastenal's annualized revenue growth of 8.3% over the last two years aligns with its five-year trend, suggesting its demand was stable.

We can better understand the company's revenue dynamics by analyzing its sales volumes. Over the last two years, Fastenal's sales volumes averaged 10.5% year-on-year growth. Because this number is better than its revenue growth, we can see the company's average selling price decreased.

Fastenal Year-On-Year Volume Growth

This quarter, Fastenal's revenue grew 1.9% year on year to $1.90 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 8% over the next 12 months, an acceleration from this quarter.

Gross Margin & Pricing Power

Fastenal has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development to stay one step ahead of the competition. Its margin also signals it sells differentiated products, not commodities. As you can see below, it's averaged an exceptional 46% gross margin over the last five years. Said differently, roughly $45.97 was left to spend on selling, marketing, and general administrative overhead for every $100 in sales.

Fastenal Gross Margin

This quarter, Fastenal's gross profit margin was 45.5%, in line with the same quarter last year. Zooming out, the company's margin has remained steady over the last 12 months, suggesting its input costs have been stable.

Operating Margin

Fastenal has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.5%. This isn't surprising as its high gross margin gives it a favorable starting point for ultimate operating profitability.

Analyzing the trend in its profitability, Fastenal's annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.

Fastenal Operating Margin (GAAP)

This quarter, Fastenal generated an operating profit margin of 20.6%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Fastenal's decent 8.5% annual EPS growth over the last five years aligns with its revenue performance. This alone doesn't tell us much about its day-to-day operations. Fastenal EPS (Adjusted)

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Fastenal, its two-year annual EPS growth of 8.8% is similar to its five-year trend, implying stable earnings power.

In Q1, Fastenal reported EPS at $0.52, in line with the same quarter last year. This print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Fastenal to grow its earnings. Analysts are projecting its EPS of $2.02 in the last year to climb by 9% to $2.20.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Fastenal has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a cash cushion. The company's free cash flow margin has been among the best in the industrials sector, averaging 13.5% over the last five years.

Taking a step back, we can see that Fastenal's margin expanded by 4.3 percentage points during that time. This is encouraging and shows it's heading in the right direction.

Fastenal Free Cash Flow Margin

Fastenal's free cash flow clocked in at $284.8 million in Q1, equivalent to a 15% margin. The company's margin regressed as it was 4.1 percentage points lower than in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause quarter-to-quarter swings in the short term.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Fastenal's five-year average ROIC was 30.9%, placing it among the best industrials companies. Just as you’d like your investment dollars to generate returns, Fastenal's invested capital has produced excellent profits.

Fastenal Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Fastenal's ROIC averaged 4.9 percentage point increases each year. The company has shown the ability to generate good returns in the past, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Fastenal reported $237.1 million of cash and $483.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.70 billion of EBITDA over the last 12 months, we view Fastenal's 0.1x net-debt-to-EBITDA ratio as safe. We also see its $3.6 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Fastenal's Q1 Results

We were impressed by how significantly Fastenal blew past analysts' volume expectations this quarter. On the other hand, its EPS missed and its operating margin fell short of Wall Street's estimates. Overall, this was a mediocre quarter for Fastenal. The company is down 1.9% on the results and currently trades at $64.79 per share.

Is Now The Time?

Fastenal may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Fastenal is a good business. First off, its revenue growth has been decent over the last five years and is expected to increase in the short term. On top of that, its impressive gross margins indicate the mission-critical nature of its products, and its impressive operating margins show it has a highly efficient business model.

Fastenal's price-to-earnings ratio based on the next 12 months is 30x. There are definitely things to like about Fastenal and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the industrials landscape, we think there's a lot of optimism already priced in. This is a business you should add to your watchlist - we believe there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $66.97 right before these results (compared to the current share price of $64.79).

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