- Fastenal had a better-than-expected quarter despite slowing growth, sufficient to sustain the capital return outlook.
- The diversified business model provides some insulation from macroeconomic headwinds impacting some end markets.
- Although analysts' support is lukewarm, they support the market and suggest a new all-time high is possible this year.
Fastenal (NASDAQ:FAST) stock has increased more than 250% since 2016 due to customer growth, the growing number of Onsite locations, deepening service penetration, and improving business metrics. The rally in stock prices can continue because those factors continue to drive results. The 2024 results have slowed from prior years, but growth is sustained, and outperformance is present, sustaining the long-term growth outlook and the capability for capital returns.
Simply put, the business model is genius. Companies that wish to reduce costs and increase efficiency by improving their management of input inventory use Fastenal. Fastenal manages the inventory of work-related items with a full slate of inventory management solutions. The critical solution is Onsite services, which provide inventory and inventory management on-site at businesses across verticals. Onsite machines and services provide work-related inventory, including all manner of fasteners and other products ranging from cans of WD-40 and spray paint to glues, tapes, and any easily vented small-to-medium-sized objects.
Fastenal Outperforms in Q3, Reduces Debt
Fastenal had a solid quarter in Q3, which shows the resiliency of its diversified business. While sales of fasteners were down due to sluggish activity caused by macroeconomic headwinds, sales of maintenance and safety-related products rose. The net result was a 3.5% increase in systemwide revenue to $1.91 billion, 50 basis points above the consensus.
Internal metrics are favorable. The 4% decline in fasteners was offset by a 4.7% increase in non-fastener items, with growth of national accounts (larger clients) up 5.6%, offset by a 41.% decline in non-national accounts. An extra day impacted the results, but organic growth is present, with daily sales up 1.9%. Sales growth is driven entirely by volume due to the increased number of large clients and Onsite locations. Looking forward, sales of fasteners should improve in 2025 as the headwind of high interest rates dissipates.
The margin news was mixed. The net income margin contracted on a 100-basis-point contraction in gross margin offset by lower SG&A expense. The takeaway is that the net income margin contracted by only 90 basis points, less than expected. This left the GAAP EPS at $0.52, flat compared to the prior year and 200 basis points above the consensus estimate reported by MarketBeat.com, improving the outlook for full-year results and the outlook for balance sheet improvement.
Fastenal Builds a Better Balance Sheet for Investors
Fastenal had a positive cash flow quarter in Q3, improving its financial position and shareholder value. Highlights include increased cash, inventory, receivables, and current and total assets, compounded by decreased long-term debt and increased shareholder equity.
Equity is up by 6% year-to-date and is expected to continue improving in the current quarter and next year.
Regarding leverage, the company’s debt position is net cash, and the total leverage fell by 70 basis points with long-term debt less than half the cash position and 0.35x equity.
Analysts Provide Tailwinds for Fastenal Stock
The analysts' support is not robustly bullish. Still, it is favorable to shareholders, with the consensus of nine major firms a Hold with a price target rising before and after the Q3 release. The first revision on Marketbeat’s radar is an increased price target from JPMorgan, which lifts the low-end range. Consensus assumes fair value with the stock trading near the $69 level, lagging the price action, but revisions trends suggest a move to the high-end range is possible. A revision from Bank of America before the release set the price at $85, sufficient for a new all-time high.
Price action is bullish following the release. The action surged by 5% to test resistance at a critical level. That level is near the baseline of a reversal pattern. A move above it could potentially send this stock up by $10 to the $82 level to set a new all-time high. However, the critical resistance aligns with an open window formed earlier in the year, so investors should expect to see some volatility in Q4, if not range-bound trading until more news comes out. 