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Stock Analyst Update

Fastenal's Strong Top-Line Growth Continues

The wide-moat industrial distributor's growth is being driven by improving end market demand and the company's vending and onsite growth efforts.

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 Fastenal (FAST) reported strong third-quarter results, in our view, that beat consensus revenue and EPS estimates for the second consecutive quarter. Third-quarter revenue increased 13% year over year for the wide-moat-rated industrial distributor to $1.28 billion, beating consensus by about $7 million. And adjusted diluted EPS of $0.68 increased 36% year over year, beating the $0.67 consensus estimate. Yet, Fastenal's earnings release triggered its stock to sell off, presumably due to the 100-basis-point year-over-year decline in the firm's gross margin and uncertainty surrounding the potential impact of tariffs. However, like previous quarters, much of the gross margin decline was due to a continued mix shift toward lower-gross-margin nonfastener products and national accounts. Higher freight costs also weighed on gross margin during the quarter. Despite the 100-basis-point gross margin contraction, Fastenal's operating margin expanded 30 basis points to 20.5%, which demonstrates Fastenal's ability to leverage its fixed costs. Incremental operating margin during the third quarter was 23%, up from approximately 21.5% last quarter and 16.5% during the first quarter. We've raised our fair value estimate of Fastenal's stock to $55 per share from $54, as the favorable impact from the time value of money since our last update and our downward-revised operating expenses as a percentage of sales assumptions more than offset our tempered gross margin assumptions.

Fastenal continues to enjoy strong organic revenue growth driven by improving end market demand and the company's vending and onsite growth initiatives. Fastenal's industrial vending and onsite strategy continues to gain traction with customers, supporting the firm's strong growth. At the end of the quarter, 78,706 Fastenal vending machines were installed at customer facilities, up 14% year over year, and the firm had 828 active onsite locations versus 555 onsite locations last year.

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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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