Skip to Content
Stock Analyst Update

Positives Dampen Some Headwinds at Fastenal

Despite a few bright spots in the latest earnings release, shares of this wide-moat industrial distributor are fully valued.


We reiterate  Fastenal's (FAST) $41 fair value estimate and wide-moat rating. The third-quarter report reflected many of the headwinds present throughout 2016, including weak demand from manufacturing and nonresidential construction customers, offset by positive sales trends finally emerging in Canada, as well as new account gains in vending and customer onsite stores. Despite a few bright spots in the latest earnings release, shares are fully valued and we believe other companies in industrial distribution, such as Wesco International, offer a more attractive margin of safety at current levels.

Fastenal’s third-quarter sales grew 2% year over year to $1.01 billion. Despite 3% and 2%, respective sales declines among manufacturing and nonresidential construction customers that make up 70%-75% of Fastenal’s customer base, new vending installations, and success with a plan to add 200 new customer onsite stores generated net sales growth. Gross margin contracted 100 basis points to 49.5%, reflecting large customer account additions as well as lower sales of high-margin fasteners to cyclically depressed manufacturing customers. Operating margin contracted 210 basis points to 20.0%, reflecting gross margin compression and upfront costs related to personnel to support new vending relationships and distribution infrastructure investment.

Year-to-date, free cash flow declined 22% to $220 million. Although cash flow from operations was only down 5%, similar to the decline in net income, capital expenditures are running 36% higher. This reflects a new large vending relationship, as well as growth in the company's store base by 2% in 2016, relative to net declines in the store base in 2014 and 2015. During the quarter, cash flow largely went toward dividend payouts. The company appears to currently have share repurchases on hold while it reviews its capital allocation priority set, concurrent with the arrival of a new CFO only several weeks ago.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Kwame Webb does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.