Fastenal (FAST) Outshines Expectations, Powers Higher Despite Headwinds

Fastenal, a leading distributor of industrial products such as fasteners, bolts, and screws, saw its stock rise by 6% today following the release of its Q3 earnings report.

While the company faced continued challenges from subdued manufacturing activity across the U.S., Fastenal’s earnings beat modest expectations, and its revenue growth was in line with forecasts. This performance, though modest, provided a sense of relief to investors against a backdrop of challenging economic conditions.

Revenue and Earnings Overview

For the third quarter, Fastenal reported revenue of $1.91 billion, representing a year-over-year increase of 3.5%. However, revenue remained flat when compared to the previous quarter, indicating persistent sluggishness in the broader industrial sector. Earnings per share came in at $0.52, showing slight improvement over the second quarter but remaining flat compared to the same period last year.

This performance highlights the ongoing weakness in the U.S. manufacturing sector, which has been grappling with reduced business activity. Notably, Fastenal’s results serve as a bellwether for the broader economic environment due to its widespread presence across various industries and its large base of customers.

Challenges in Core Markets

Fastenal’s core fasteners business, a significant component of its operations, continued to struggle in the third quarter.

The daily sales rate (DSR) for fasteners contracted by 4.0% year-over-year, following a decline of 8.5% in the previous year. The primary drivers of this contraction were the non-residential construction and reseller end markets, which saw declines of 5.5% and 6.4%, respectively.

This weakness in key sectors reflects the ongoing challenges facing U.S. manufacturing and construction. Throughout 2023, the company has noted a downturn in industrial production, and these trends continued into Q3, further weighing on Fastenal’s performance in its core business lines.

National vs. Non-National Accounts: A Diverging Story

One of the notable aspects of Fastenal’s recent performance is the divergence between its national and non-national accounts. National accounts, which consist of large customers, saw a healthy increase in sales, with DSR expanding by 5.6% year-over-year in Q3. In contrast, non-national accounts, which include smaller, regional customers, experienced a 4.1% decline in DSR.

This trend indicates that larger companies are weathering the economic challenges better than smaller ones, likely due to greater resources and more diversified operations. The weaker performance of non-national accounts has put pressure on Fastenal’s margins, with operating margins slipping by around 65 basis points year-over-year.

Silver Linings: Strength in Non-Fasteners and Onsite Expansion

Despite the ongoing difficulties in the fasteners business, Fastenal found some bright spots in its non-fasteners segment. The non-fasteners business, which includes products like safety equipment, tools, and supplies for warehousing, saw a 4.7% increase in DSR during the quarter. This growth was primarily driven by strong demand from warehousing customers, reflecting the ongoing need for supply chain management solutions.

Another key strength for Fastenal in Q3 was the continued expansion of its Onsite program. Onsite locations are dedicated Fastenal inventory and service sites set up at customer locations, offering tailored solutions and improving customer reliance.

In Q3, the company added 93 new Onsite customers, bringing its year-to-date total to 302 new signings. By the end of the quarter, Fastenal had nearly 2,000 active Onsite locations, representing an 11.7% increase compared to the same period last year.

The success of the Onsite program underscores its strategic importance to Fastenal. Customers using Onsite services tend to become more dependent on Fastenal for their parts and supplies, making them less likely to turn to competitors.

This increased customer stickiness helps Fastenal maintain steady sales in a challenging environment, evidenced by a modest but meaningful increase in DSR for Onsite customers during the quarter.

Outlook: Challenges Persist but Opportunities Remain

Fastenal’s Q3 performance mirrors its results from the previous quarter—continued headwinds in the manufacturing sector, tempered by strength in certain areas like non-fasteners and the Onsite program.

The subdued activity in U.S. manufacturing, non-residential construction, and reseller markets remains a concern, and the company’s flat sequential revenue growth reflects the difficulties facing the broader economy.

However, Fastenal’s ability to maintain steady earnings and expand its Onsite program shows that the company is navigating these challenges better than expected. While the near-term outlook remains clouded by economic uncertainties, Fastenal’s performance in Q3 indicates resilience, especially in its ability to leverage larger accounts and expand its non-fasteners business.

Conclusion

Fastenal’s third-quarter earnings report offers a mixed but largely positive story for investors. While the company continues to face significant challenges from a subdued industrial economy, its ability to grow revenue modestly and maintain stable earnings has provided some relief to investors.

The divergence between large and small customer performance and the continued growth of its Onsite program highlight areas of strength that could help Fastenal weather further economic turbulence.

As the manufacturing sector continues to struggle, Fastenal’s strategic initiatives and strong relationships with larger customers may provide the stability needed to navigate the uncertain road ahead.