Fastenal’s (NASDAQ: FAST) stock price has been on the rise since it reported earnings on Friday, July 15, 2024. The industrial company’s shares have been up 5.7% since then. This is after the company reported adjusted earnings per share (EPS) that met analysts' expectations and revenue that was slightly higher than expected.

The firm’s total return for the year sits at 5.7%, underperforming its sector’s performance of 10.8%, represented by The Industrial Select Sector SPDR Fund (NYSEARCA: XLI). Let’s get a better understanding of Fastenal's operations, which is the 8th largest firm in the Trading Companies and Distributors industry. We’ll then dive into its recent financial results, tying in some important macroeconomic data, and close by examining what analysts are expecting going forward.

Fastenal's Operations: Prioritizing Growth in Onsite Locations

Fastenal operates as one reportable segment, with 97% of its revenues attributed to North America. 84% comes from the United States, and 13% comes from Canada and Mexico. The vast majority of its sales are business-to-business. The company distributes a variety of fastener products as well as other related industrial and construction supplies. This includes items like bolts, nuts, and screws. The firm’s fastener product line represented 32% of consolidated sales in 2023.

The company primarily reaches its customers through its branches and on-site locations. Customers can find branches within several miles of their facilities, while on-site locations are inside the customer's own facility. An e-commerce channel is also available; however, 55% of net sales came from branch locations and 40% from on-site locations in 2023. In total, the firm has 3,419 locations.

Over the past 10 years, the firm has made the strategic decision to massively increase its number of on-site locations, believing that the closer they get to the customer, the better service they can provide. In 2014, on-site locations made up just 8% of total locations. Today, they make up 53%. The firm has increased its revenues at on-site locations by 750% over that span. It has also continued to grow its branch revenue at a yearly rate of 2.6%.

Adjusted EPS aligned with expectations at $0.51, a decline from $0.52 for the same period last year. Net sales rose by 1.8% and were $10 million higher than expected at $1.92 billion. The company's sales were positively impacted by increasing its relationships with larger customers. Sales increased from 65 out of the top 100 largest customers.

The success of onsite locations that have opened in the last two years was also a positive, as sales from these locations more than outpaced declines from older locations. The company had 107 signings for new onsite locations to be opened in the future, the highest number in eight quarters. The goal is for 400 signings in 2024, which they are currently on pace to exceed. The firm considers expanding onsite locations a key path to growth, making this a vital contributor to the recent increase in share price.

Industrial production is tied closely to the company’s revenues, with industrial companies accounting for 75% of revenues. The U.S. Manufacturing Purchasing Managers' Index (PMI) is a forward-looking indicator of industrial production. In 19 of the last 20 months, the PMI has shown production to be shrinking. A contraction of this duration has not occurred since the Great Financial Crisis. Despite this, Fastenal has grown its sales every quarter in that period. Despite intense industry headwinds, increasing sales, onsite locations, and relationships with large customers contributed to the positive price reaction.

Pricing declines negatively affected sales by 30 to 60 basis points. The gross margin fell 40 basis points to 45.1%, and the operating margin fell 80 basis points. Despite this, the firm still has gross and operating margins in the top 20% of its sector. The company experienced a divergence in growth between its fastener products, where revenue declined 3%, and its non-fastener products, where revenue grew 4.2%.

Analysts Lower Price Targets for Fastenal Despite Share Price Rising 

Despite the positive market reaction following the earnings release, two analysts subsequently lowered their price targets. The three analysts who updated their price targets decreased it by an average of $4.70. The average of those price targets is $67, nearly equal to the current share price. Most other analysts see an even lower price target. One metric supporting this sentiment is Fastenal’s relatively high forward price-to-earnings ratio of 32.5. This sits in the top 20% of Fastenal’s historic range. It is also in the top 20% for the U.S. industrials sector and the overall U.S. market.