A Member of Pat McKeough’s Inner Circle recently asked for his advice on a leading wholesale industrial and construction supplies distributor focused on the construction and manufacturing industries.
Pat likes the company’s recent strong sales growth, but notes that earnings in the recent quarter declined 3.1% on higher Chinese tariff costs. While the company’s innovative use of vending machines offers it a unique sales platform, its earnings will likely need the trade war to end in order to move higher.
Q: Hey, Pat. What do think of Fastenal?
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Fastenal Company (Symbol FAST; www.fastenal.com) is a leading wholesale distributor of industrial and construction supplies. It draws 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. It also serves farmers, truckers, railroads, mining companies, governments, schools, and certain retail trades.
The company’s product lines include 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.
Fastenal has 2,165 retail locations in the U.S., Canada, Mexico, and Europe. That network is supported by 13 distribution centres and 14,372 employees. Sales in the U.S. account for 85.6% of total revenue.
The company has focused on innovative approaches to gaining market share, including onsite customer locations (sales and service provided at a customer’s facility) and onsite industrial vending devices. By setting up in a customer’s facility, it creates a closer and more secure relationship with its clients.
Inner Circle: Acquisitions have boosted revenue and earnings
Fastenal has also been acquiring industrial supply companies, including Av-Tech Industries, a distributor in the aerospace industry. It bought the firm in 2014, and in 2017 purchased Manufacturers Supply Co., a distributor of industrial fasteners and supplies.
As a result of acquisitions and innovative sales programs, Fastenal’s revenue rose 35.1%, from $3.7 billion in 2014 to $5.0 billion in 2018. Earnings jumped 52.1%, from $494.2 million ($0.83 per share) in 2014 to $751.9 million ($1.31 per share) in 2018.
All per-share numbers were adjusted for a two-for-one stock split on May 22, 2019.
In the three months ended June 30, 2019, sales for the company rose 7.7%, to $1.4 billion from $1.3 billion a year earlier. Earnings fell 3.1%, to $204.6 million, or $0.36 a share, from $211.2 million, or $0.37. The decline in profits was mainly due to higher costs for the products it sells, in part because of U.S. tariffs on Chinese imports. While Fastenal was able to successfully raise prices to help offset those duties, the company also faced general price increases on those items.
Fastenal’s long-term debt of $497.0 million is a very low 3% of its market cap. It holds cash of $175.0 million, or $0.31 a share.
In recent years, the company has started to sell its industrial products through vending machines that operate 24 hours a day, 7 days a week. It now operates 85,871 industrial vending devices, up 12.9% from 76,069 a year ago. 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), which is crucial in a time of very low unemployment. The investment in vending machines has also freed up funds to invest in more distribution hubs.
In the latest quarter, Fastenal raised its quarterly dividend by 2.3%, to $0.22 a share from $0.215, for a yield of 2.5%. The company has a long history of dividend increases, including two increases each for both 2018 and 2019.
The stock trades at 25.7 times the $1.37 a share that Fastenal will probably earn in 2019. Fastenal benefits from being a niche supplier of industrial and construction products. That cuts its reliance on customers that operate in these cyclical industries. Still, the company will need sustained economic growth to post higher sales and earnings.
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