Fastenal Company FAST has been benefiting from strong industrial vending business, onsite locations and cost-saving efforts. Also, its strong liquidity position is enough to overcome any unforeseen situation owing to coronavirus in near term.
In first-quarter 2020, its top and bottom line topped the respective Zacks Consensus Estimate by 0.2% and 2.9%, respectively, despite continued slower activity levels. Notably, its shares have gained 2.5% in the past three months against its industry’s 2.5% fall. The outperformance can be attributable to the company’s solid earnings surprise history, having surpassed analysts’ expectations in five out of the last eight quarters.
However, slower end-market activity throughout the business has been a concern for Fastenal over the last few quarters. Also, negative customer/product mix, higher freight expenses and stiff competition raise concerns.
Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Major Growth Driver
Industrial vending business is one of the primary growth drivers for Fastenal. The segment has the potential to significantly increase its sales and profits in the future despite economic slowdown.
Through FAST Solutions, the company installs vending machines at a customer’s location and keeps it filled with the products they need. These machines help customers in controlling their inventory and administrative costs, while reducing product consumption. Notably, the non-fastener product line has benefited significantly from its initiatives pertaining to industrial vending.
Daily sales through vending devices grew at a low double-digit pace in the first-quarter 2020, owing to the increase in the installed base. As of Mar 31, 2020, Fastenal operated 92,124 vending machines, up 10.4% year over year. Notably, both its April net and daily sales grew 6.7% year over year despite coronavirus-led shutdown and supply-chain disruption. The upside was driven by increase in safety product sales.
Meanwhile, its onsite locations — a mini-Fastenal shop located in a customer’s plant — help to serve customers better. As of Mar 31, 2020, the company had 1,179 active sites, up 24.8% from the comparable year-ago period. The increased number of onsite locations is likely to expand Fastenal’s market share.
Apart from these initiatives, the company intends to reduce costs arising from tariffs and freight expenses. The company has undertaken various cost-control measures like automating warehouses, increasing delivery efficiency through its trucking network and selling more private-level products with higher margins. Notably, the company’s strong liquidity position of approximately $505 million, including $161 million cash and cash equivalents, and $344 million existing under revolver, bode well.
Slower end-market activity, lower freight revenues due to deleveraging of a freight network and supply-chain disruption due to coronavirus remain a concern.
During March, the company witnessed significant disruption due to coronavirus. In fact, the product mix has shifted abruptly toward lower margin government/safety products from higher margin manufacturing/fasteners. The company expects to temporarily experience significantly lower gross margin in the near term.
In first-quarter 2020, the company’s gross and operating margin contracted 110 bps and 10 bps, respectively, due to changes in product and customer mix, and deleveraging of fixed costs. These headwinds are likely to persist in the future for Fastenal, which shares industry space with BMC Stock Holdings, Inc. (BMCH - Free Report) , GMS Inc. (GMS - Free Report) and Builders FirstSource, Inc. (BLDR - Free Report) .
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