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Sometimes investors need to take a page from Warren Buffett’s investing handbook: buying boring businesses can be very profitable.
Take Fastenal (FAST) - a distributor of industrial consumables. I suggested this boring industrial stock was a buy in the $60s in this space back in December 2023. FAST was trading below $65 at the time.
Now, the stock is trading very near its all-time high around $79, and is up 20% year-to-date.
Fastenal is on a Roll
The company operates in 25 countries, but more than 95% of its sales take place in its three main markets of the U.S., Canada and Mexico. Over 70% of its customers are in the manufacturing and non-residential construction sectors.
As its name suggests, Fastenal started out as a provider of fasteners – nails, screws, nuts and bolts, etc. – to customers. It began operations in 1967, with the opening of its first store. Since then, Fastenal has built one of the largest industrial distribution businesses in the U.S.
For many years, Fastenal’s growth story was driven by its expanding branch count. While that's still a component of the company’s business model, other strategies — including expanding its product portfolio, its vending and inventory management services, and, most recently, its Onsite program — have become increasingly important growth drivers.
Just look at its latest well-received earnings results, which sent its stock soaring by over 9% on Oct. 11.
At first glance, the company’s numbers looked little changed from a year ago. However, there were some silver linings. Its non-fastener products enjoyed a +4.7% bump in DSR (daily sales rate), lifted by strength with warehousing customers.
And Fastenal's critical competitive edge - its Onsite locations - found 93 new customers in the third quarter, giving it 302 year-to-date signings.
Exiting the quarter, the company boasted nearly 2,000 active sites, an 11.7% increase year-over-year. Onsite remains vital to its success; it carves out a “moat” for Fastenal, since Onsite customers tend to rely less on competition for parts.
Fastenal's Strategic Shift
Today, Fastenal has installed over 100,000 industrial vending machines, up from 47,000 in 2014. Its managed inventory sales account for 40% of consolidated sales. Its on-site program has also experienced strong growth, expanding from approximately 200 on-site locations in 2014 to over 1,900 on-site locations today.
Fasteners still represent around a third of its business, but Fastenal now sells a much broader range of consumables, including nuts, bolts, washers, and even protective wear and communication equipment. It sells its vast array of products at 3,419 in-market locations (stores and Onsite), as well as through vending machines at customer locations, and through e-commerce channels.
The company offered nine product lines as of the end of 2023. The fastener product line, which is primarily sold under the Fastenal product name, represented 32% of net sales in 2023. Fasteners are ubiquitous in manufactured products, construction projects, and maintenance and repair. In many cases, a fastener is a critical part in machine uptime and/or effective use.
In 1993, Fastenal began to add additional product lines, which made up the remaining 68% of sales in 2023. These products tend to move through the same distribution channel, get used by the same customers, and utilize the same logistical capabilities as its fastener product line.
Unlike fasteners, non-fastener product lines (mostly made by other companies) benefit a lot from the development of industrial vending machines. The most significant category of non-fastener products is the safety supplies product line, which accounted for 21% of sales in 2023. This product line has experienced dramatic sales growth in the last 10 years, thanks to Fastenal’s success in expanding its industrial vending business.
There is also Fastenal’s digital sales channel, including e-commerce, which were a major growth driver in the third quarter.
Its digital sales rose 10.8% year over year in the quarter to $1.17 billion, compared to $1.05 billion in the year ago period. This growth includes e-commerce transactions and sales through Fastenal Managed Inventory (FMI) programs. These programs feature FASTVend, its vending machine deployed at customer locations to facilitate on-site sales and services.
E-commerce represented 33.2% of all sales in the third quarter of 2024. That’s a significant jump from 24.5% in the prior year. Based on these metrics, estimates are that Fastenal digital sales reached $634.4 million in the quarter, marking a 39.7% increase from $452.2 million a year ago.
Fastenal’s Future Outlook
The benefits of Fastenal’s vending, inventory management, and on-site services are twofold.
Not only do these services drive revenues, but more importantly, they embed Fastenal in its customers’ procurement processes, which leads to higher retention rates and pricing power. Fastenal has a first mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992. Its cost advantages have allowed it to earn strong returns on invested capital historically (approximately 25% on average over the past two decades).
Over the long term, I expect Fastenal to generate mid-single-digit sales growth and high single-digit earnings per share (EPS) growth.
Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the economic cycle. That makes it unusual in the industrial sector.
All of this means FAST can still be bought below $82.
