Fastenal Company FAST is gaining significantly from increased unit demand, particularly driven by growth in the industrial vending business and existing Onsite locations. Also, the company’s cost-saving initiatives are aiding the business to generate improved earnings.
Over the past three months, its shares have gained 16.9% compared with the industry and S&P 500’s 0.9% and 8.1% growth, respectively.
Bullish investors’ sentiment surrounding the stock justifies its current Zacks Rank #2 (Buy) and the expectation of outperformance in the near term.
Let’s delve deeper into the factors substantiating the company’s growth.
Strong Performance on Improved Unit Demand: Fastenal’s performance has been robust over the last few quarters. The company’s earnings topped analysts’ expectations in four out of the last six quarters. Moreover, its revenues surpassed the consensus estimate in nine of the trailing 11 quarters.
In third-quarter 2019, the company reported solid results despite slower activity levels. Its earnings surpassed the Zacks Consensus Estimate by 5.7% and increased 8.8% from the year-ago level. Net sales also grew 7.8% year over year, backed by the above-mentioned tailwinds. Daily sales grew 6.1% from the prior-year quarter.
The company’s earnings for 2019 are expected to grow nearly 4.6%. Fastenal has a three-five year EPS growth rate of 14%.
For net sales, the consensus estimate for 2019 is currently pegged at $5.36 billion, indicating nearly 8% improvement from the year-ago period.
Industrial Vending Business, a Boon: The Industrial vending business is one of the primary growth drivers for Fastenal, and has the potential to significantly increase sales and profits. Fastenal adopted FAST Solutions, an industrial vending process that has the potential to revolutionize the industrial distribution system and increase profitability.
Via this solution, Fastenal installs vending machines at the customer’s location and keeps it filled with the products they need. These machines help customers in controlling their inventory and administrative cost, while reducing product consumption. Notably, the non-fastener product line has benefited significantly from initiatives pertaining to industrial vending.
Sales through vending machines grew at or near a double-digit pace in both 2017 and 2018. As of Sep 30, 2019, Fastenal operated 88,327 vending machines, up 12.2% year over year. It expects vending device signings of approximately 22,000 units in 2019.
Sales through vending devices continued to grow at a double-digit pace during the first nine months and the company is likely to sign about 22,000 vending devices in 2019. Notably, sales through vending devices grew at a pace of more than 20% in 2018 due to growth in the installed base.
Growing Onsite Locations: Fastenal has Onsite locations, in which a mini-Fastenal shop is basically located in a customer’s plant, to serve customers better. The company signed 283 new Onsite locations during the first nine months of 2019, up from 269 signings in the comparable prior-year period. As of Sep 30, 2019, it had 1,076 active sites, up 30% from the comparable year-ago period. For 2019, Fastenal expects Onsite signings within 375-400. The increased number of onsite locations is likely to expand its market share.
Cost-Control Measures: in a bid to reduce costs arising from tariffs and freight expenses, the company has undertaken various cost-control measures. The strategies include automating warehouses, increasing delivery efficiency through its trucking network and selling more private-level products with higher margins. This will aid Fastenal to improve efficiency level, thereby increasing returns.
It has been diversifying business to mitigate the risk of inflationary pressures and softness in any other business. Markedly, the company has gradually expanded from a fastener distributor to a full-line industrial supplier.
Also, it has built a national accounts team that is dedicated to servicing corporate customers. These initiatives are gaining traction and will help it to achieve profitability in the future.
Higher Return on Equity: Fastenal’s trailing 12-month return on equity (ROE) is indicative of growth potential. ROE in the trailing 12 months is 32% compared with the industry’s 12%, reflecting the company’s efficient usage of its shareholders’ funds.
Also, the company constitutes a great pick in terms of value investment, supported by a Value Score of B.
Zacks Rank & Other Key Picks
Fastenal currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the same space include BMC Stock Holdings, Inc. BMCH, GMS Inc. GMS and Builders FirstSource, Inc. BLDR. While BMC sports a Zacks Rank #1 (Strong Buy), GMS and Builders FirstSource carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
BMC’s earnings surpassed estimates in each of the trailing four quarters, with the average being 29.3%.
GMS’ earnings for the current year are expected to grow 11.1%.
Builders FirstSource outpaced earnings estimates in the last four quarters, with the average being 28.2%.
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