Fastenal Stock: Good Growth Prospects but Expensive (NASDAQ: FAST)



Investment thesis

Fastenal Company (NASDAQ: FAST) near-term revenue growth should benefit from hhealthy demand in commodity-related and capital goods markets. The company’s long-term growth prospects look strong with the opening of on-site locations and the installation of IMF. The company has also started to see a moderation in some operating expenses, such as incentive compensation, profit sharing and healthcare costs, which should benefit its margin. However, the stock is currently trading at a P/E of 27.24x Consensus EPS estimate for FY22, higher than peers WW Grainger (GWW) at 20.26x and MSC Industrial (MSM) at 13.39x. Therefore, I have a neutral rating on the stock.

Revenue outlook

Fastenal’s growth drivers include on-premises site opening, IMF (Fastenal Managed Inventory), digital solutions and national accounts. The company is targeting 375-400 on-site signings in FY22 and achieved half of its goal by signing 208 on-site signings in the first half of FY22. It signed 106 on-site signings in the first quarter of FY22 and 102 signatures in the second quarter of FY22. Fastenal’s customers benefited from the on-premises model during the time of supply chain constraints, and this accelerated its adoption. On the IMF side, the company was able to sign 86 MEU per day in Q2 FY22 and 83 in Q1 FY22, and expects 21,000 to 23,000 MEU (Machine Equivalent Units) Weighted-FMI device signatures during FY22.

In the last quarter, the company’s daily e-commerce channel sales increased 53% year-on-year, EDI (electronic data interface) sales up 53.3% year-on-year and web sales increased 51% year-on-year. EDI connects Fastenal’s system and its customer’s procurement system, providing a system-to-system exchange of electronic procurement documents such as purchase orders and invoices for direct and indirect expenses. Combined, EDI and Web sales contributed 17.1% of total sales, compared to 16.1% in the first quarter of FY22. supply to its customers. The digital footprint includes FMI sales and e-commerce sales that do not represent FMI service billing. Digital footprint accounted for 47.9% of total sales last quarter.

Last quarter, pricing contributed 6.6% to 6.9% to total sales growth, reflecting the postponement of large-scale pricing actions taken over the past 12 months to offset inflation. The company does not plan to take aggressive pricing action in the future unless there is a change in the inflationary environment. Percentage growth through pricing is expected to moderate in Q3 FY22 as the company began aggressive pricing actions in Q3 FY21 and comparisons become difficult. The company began to see a slowdown in demand since May 2022, primarily in the construction market and in markets that directly affect customers, such as automotive and recreational vehicles. However, demand in core capital goods and commodity-related markets is still healthy as manufacturers’ backlogs in these markets remain strong.

Fastenal End Market Blend

Presentation to the company’s investors

I believe that even if the market begins to slow in the near term, Fastenal should be able to grow revenue as many industrial manufacturers’ backlog remains healthy, supporting the company’s revenue growth over the course of the year. 22. The company’s long-term growth prospects look solid with the opening of on-site sites and the installation of MFIs.


Due to increased travel and higher inflation levels in the second quarter of FY22, corporate travel spending increased. Travel in the quarter increased 18% from Q2 FY19. However, the company is seeing a moderation in some expenses, such as incentive compensation, profit sharing and care costs health. This benefited the company in the quarter as its operating expense leverage improved and led to an operating margin above pre-COVID levels. Pricing actions taken by the company correspond to higher costs, price/cost neutrality and maintenance of gross margin in recent quarters. The company is also benefiting from the closure of its traditional branches and was able to achieve 60 basis points of occupancy leverage thanks to a 10% reduction in branches. Looking ahead, I believe the company’s margin should benefit from moderating operating expenses and stabilizing higher production costs.

Gross margin and operating margin of FAST

Gross margin and operating margin of FAST (Company data, GS Analytics Research)

Evaluation and conclusion

The stock is currently trading at 27.24x the consensus FY22 EPS estimate of $1.87, which is close to its five-year average P/E of 27.32x, and a significant premium per against peers MSC Direct (MSM) (trading at 13.39x FY22 EPS estimates) and Grainger Worldwide (trading at 20.26x FY22 EPS estimates). The company’s short term is supported by healthy demand in the capital goods and raw materials markets, and its long term should benefit from the opening of on-site sites and FMI facilities. However, the current valuation is not very attractive. Therefore, I have a neutral rating on the stock.


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