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Morningstar | Fastenal's Impressive Growth Continues in 1Q; FVE Raised to $62

Fastenal shares traded higher on April 11 after the wide-moat-rated industrial distributor reported strong first-quarter revenue and earnings growth. First-quarter revenue grew over 10% year over year to approximately $1.3 billion and GAAP EPS grew an even faster 12% to $0.68, which beat the consensus estimate by one penny. Fastenal's gross profit margin contracted 100 basis points year over year to 47.7% due to greater sales contribution from lower-gross-margin but higher-growth on-site, vending, and national account sales, unfavorable product price/cost, lower rebates, and higher freight costs. However, Fastenal's operating margin (excluding net gains from property and equipment sales) expanded 10 basis points to 19.9%, and its first-quarter incremental operating margin was 21.2% compared with 16.5% in the year-ago quarter. Fastenal's strong operating margin performance during the quarter is a testament to the firm's ability to control costs and realize operating leverage from its key growth drivers, which include its on-site, vending, and national account businesses.

After reviewing Fastenal's first-quarter results and end-market commentary, we now think the company can maintain a 10% sales pace over the rest of 2019 (versus our previous assumption of 9% growth for 2019). Given the favorable impact that Fastenal's growth initiatives have already had on growth and return on invested capital, and our view that these drivers have a long runway, we have increased our assumptions for stage II earnings before interest growth to 7% (from 6%) and for return on new invested capital to 28% (from 25%). These two changes essentially increase the implied terminal multiple at the end of our five-year explicit forecast. Together, our forecast adjustments increased our fair value estimate 9% to $62 per share.

Fastenal signed 105 on-site contracts (up 5% year over year) and ended the quarter with 945 active on-site locations, up over 39% year over year and almost 6% higher sequentially. If Fastenal can continue this pace of on-site signings, it will top its full-year goal of signing 375-400 new on-site locations.

The company signed 5,603 vending machines during the first three months of 2019 (down about 1% year over year) and ended the quarter with 83,410 installed vending machines, up over 13% year over year and almost 3% sequentially. Fastenal will need to pick up the pace of vending signings over the rest of 2019 to achieve management's goal of 23,000-25,000 signings this year.

Daily sales from national account customers increased a robust 17% year over year. Fastenal signed 59 new national accounts during the first quarter of 2019 compared with 32 during the fourth quarter of 2018 and 36 during the first quarter of 2018. National accounts represented 52.7% of Fastenal's sales during the quarter versus 50.3% during the year-ago quarter. The number of Fastenal's top 100 accounts reporting year-over-year sales growth increased to 81 from 78 during the same period last year.

Revenue growth across Fastenal's product lines and end markets was quite comparable during the quarter. Daily sales of fasteners grew 11.8% while daily sales of nonfastener products grew 12.7%. Daily sales to manufacturing end markets were up 13.4% and construction-related daily sales were up 13.1%. Management said that overall, "The tone of the marketplace remains constructive."