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Fastenal (FAST) Up 23% in 6 Months: Can the Bull Run Continue?

Zacks Equity Research

Fastenal Company FAST is gaining significantly from increased market demand, growth in the industrial vending business and existing Onsite locations. As a result, shares of the company have surged 23.2% compared with the industry’s 16.3% rally in the past six months. However, product and freight inflation, unfavorable product mix, pricing and competitive pressures have been hurting its gross margins. Let’s delve deeper.

Growth Drivers

Fastenal has adopted FAST Solutions, an industrial vending process, which has the potential to revolutionize the industrial distribution system and increase profitability. The company installs vending machines at the customer’s location and keeps it filled with products they need. These vending machines notify customers about the products being used and the process of using the same, subsequently controlling the customer’s inventory and administrative cost and reducing product consumption. Particularly, the non-fastener product line has benefited significantly from the initiatives pertaining to industrial vending.

Notably, industrial vending is one of the primary growth drivers for Fastenal and has the potential to significantly increase sales and profits. Sales through vending machines grew at or near a double-digit pace in both 2017 and 2018. Fastenal signed 5,603 industrial vending devices in first-quarter 2019, reflecting a 1.3% increase from the year-ago period.  

As of Mar 31, 2019, Fastenal operated 83,410 vending machines, up 13.4% year over year. It expects vending device signings within 23,000-25,000 units this year.

Moreover, the company signed 336 new Onsite locations in 2018 compared with 270 signings in 2017, reflecting an increase of 24.4%. During first-quarter 2019, Fastenal signed 105 new Onsite locations, up from 100 signings in the prior-year period. As of Mar 31, 2019, the company had 945 active sites, up 39.4% from the comparable year-ago period. The increased number of Onsite locations is likely to expand Fastenal’s market share. For 2019, Fastenal expects Onsite signings within 375-400.



Headwinds

Negative customer/product mix due to solid growth of lower-margin national accounts and lower proportion of higher margin fasteners has been denting Fastenal’s gross margin since the past three years. The customer mix shifted toward the large-account end-market, which produces low-margin gross profit but stronger operating income. The product mix shifted from high-margin fastener products to lower margin non-fastener products.

In 2017 and 2018, gross margin contracted 30 bps and 100 bps, respectively. Adding to the woes, Fastenal ended first-quarter 2019 with a gross margin of 47.7%, down 100 bps from the year-ago level, mainly due to product and customer mix as well as freight inflation.

Meanwhile, earnings estimates for 2019 have remained stable over the past 30 days, depicting analyst's concern surrounding the stock.

Zacks Rank & Key Picks

Fastenal, which shares space with Beacon Roofing Supply, Inc. BECN, has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include BMC Stock Holdings, Inc. BMCH and Builders FirstSource, Inc. BLDR. While BMC sports a Zacks Rank #1 (Strong Buy), Builders FirstSource carries a Zacks Rank #2 (Buy). 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, the average being 39.4%.

Builders FirstSource’s earnings surpassed estimates in each of the trailing four quarters, the average being 17.9%.

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Fastenal Company (FAST) : Free Stock Analysis Report
 
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
 
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Beacon Roofing Supply, Inc. (BECN) : Free Stock Analysis Report
 
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