A Member of Pat McKeough’s Inner Circle recently asked for his advice on Fastenal Company, a leading industrial and construction supplies distributor.
Pat likes the company’s steady growth, robust financial position and its focus on controlling costs. Its onsite location growth are very promising. However, Pat notes that the shares are expensive relative to their forecast earnings.
FASTENAL COMPANY (Symbol FAST on Nasdaq; www.fastenal.com) is a leading wholesale distributor of industrial and construction supplies. It draws almost all its clients from the construction and manufacturing industries.
Those construction customers include general, electrical, plumbing, sheet-metal, and road contractors. In manufacturing, Fastenal sells to original-equipment manufacturers and maintenance/repair operations. The company also serves farmers, truckers, railroads, mining companies, governments, schools, and certain retail trades.
Fastenal’s product lines are varied: threaded fasteners; tools and equipment; abrasives and cutting tools; components and accessories for hydraulics, pneumatics, plumbing and HVAC; material-handling products; and janitorial, welding, safety, and electrical supplies. It also sells personal protective equipment (PPE), hand sanitizer and related products.
The company has about 1,597 retail locations in the U.S., Canada, Mexico, and elsewhere internationally. It also has 1,986 Onsite locations (providing dedicated sales and service to one or two clients from within, or close by, their own facilities). By setting up in a customer’s facility, it creates a closer and more secure relationship with that customer.
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In addition to its retail and onsite locations, Fastenal sells its industrial products through vending machines operating 24 hours a day, 7 days a week. It now operates 123,193 industrial vending devices. This sales platform lets it continue to close some of its brick-and-mortar stores; that lowers the company’s fixed costs. In turn, Fastenal can then spend more on employee retention incentives (wages, bonuses, and commissions). The investment in vending machines has also freed up funds for the company to invest in more distribution hubs.
Inner Circle: Solid financial results, but Fastenal’s valuation remains high
For the three months ended September 30, 2024, the company’s overall sales rose 3.5%, to $1.91 billion from $1.85 billion a year earlier. Revenue was higher due to increased unit volumes and an extra business day in the quarter compared to a year earlier. Excluding the additional day, sales increased by 1.9%.
Earnings rose 0.9% to $298.1 million, or $0.52 a share, from $295.5 million, or $0.52.
Fastenal holds $292.2 million in cash. Its long-term debt is just $125.0 million.
With the February 2024 payment, the company raised its quarterly dividend by 11.4%, to $0.39 a share from $0.35, for a yield of 1.9%. It paid a special dividend of $0.38 a share in December 2023.
Meanwhile, the shares are up 55.2% over the last two years, and the stock trades at a high 34.0 times the $2.18 a share its forecast to make in 2025.
Fastenal’s outlook is positive. Despite today’s softer economy, the company continues to report steady sales and profits. That bodes well for when the economy fully recovers.
Meantime, Fastenal’s focus on controlling costs—by automating warehouses, increasing delivery efficiency, and selling more private-label products with higher profit margins—should pay off.
Recommendation in Pat’s Inner Circle: Fastenal Company is okay to hold.
