Fastenal Company (FAST) is involved in the wholesale distribution of non-residential construction and industrial supplies in the United States, Canada, Mexico, and worldwide. Stronger demand from manufacturing and non-residential construction markets, thanks to an increase in economic activity in the second quarter, helped improve the company’s operational results in its last reported quarter. Its shares have soared 12.8% in price year-to-date and 4.3% over the past three months. FAST is based in Winona, Minn.

Although FAST’s growing digital footprint, which represented 41.7% of its sales in the second quarter, and improved demand from onsite customers bode well for the stock, its valuation at its current share price level could be concerning. 

In addition, while President Biden's bipartisan infrastructure deal could boost FAST’s construction parts and equipment-related sales, growing inflationary pressure and a reduction in its national account sales and government customers could hamper its growth.

So, here's what we  think could influence FAST’s performance in the coming months:

Business Headwinds

The demand for personal protective equipment (PPE) and sanitation products that FAST experienced in the second quarter of 2020 declined significantly in the second quarter of 2021. Furthermore,  the company’s net sales continue to be impacted by increasing pricing due to product and transportation cost inflation. Also, its sales made to a small number of large national account customers and large surge-type sales made primarily to government customers declined significantly compared to the second quarter of 2020. And  its operations were negatively impacted by the increased use of external service providers to manage tight transportation supply chains.

Strategic Collaboration

Since last year, FAST has been engaged in the long-term test program for  two battery-electric Freightliner eM2 box trucks. The company has been helping drive innovation and sustainability as the trucking industry moves to develop alternative-fuel equipment. Recently, it completed a pilot for the Freightliner eCascadia as a part of a collaboration between Penske Truck Leasing and Daimler Trucks North America. As FAST continues testing its electric vehicle (EV) units, it is uniquely positioned to help accelerate the development of commercial EV technology.

Mixed Quarterly Performance

During the second quarter, ended June 30, 2021, FAST’s net sales decreased marginally year-over-year to $1.51 billion. Its Fastener daily sales grew 28.4%, while its Safety product daily sales declined 38.6%. The company’s gross profit rose 4.3% year-over-year to $700.7 million, while its operating income grew 0.5% from the prior-year quarter to $317.8 million.

FAST’s net earnings came in at $239.7 million for the quarter, versus  $238.9 million for the same period last year. Moreover, its cash and cash equivalents expanded 59.7% from the prior-year quarter to $321.8 million for the six months ended June 30, 2021. But its net cash provided by operating activities declined 9.3% year-over-year to $446.3 million over this period.

Stretched Valuation

FAST’s 5.50x forward EV/Sales ratio is 187.1% higher than the 1.92x industry average. And in terms of non-GAAP forward PEG, the company is currently trading at 4.36x, which is 159.8% higher than the 1.68x industry average. Likewise, its 5.40x forward Price/Sales is 255% higher than the 1.52x industry average. The stock’s 10.58 forward Price/Book ratio compares with the 3.07 industry average.

POWR Ratings Reflect Uncertainty

FAST has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. FAST has a D grade for Value. The stock’s higher-than-industry valuation multiples are in sync with this grade.

In terms of Sentiment grade, the company has a D. However, FAST has a B Momentum grade, which is consistent with its price returns year-to-date.

In addition to the grades we’ve highlighted, one can check out additional FAST ratings for Growth, Stability, and Quality here. FAST is ranked #56 of 90 stocks in the B-rated Industrial – Equipment industry.

Click here to check out our Industrial Sector Report for 2021

Bottom Line

Substantial improvements in manufacturing and construction demand in its last reported quarter, coupled with accelerated innovation and digital footprint expansion, has helped FAST improve its operating results significantly in the last reported quarter. However, its stretched valuation and several business headwinds have added uncertainties to its prospects. Thus, we think investors should wait until the company fares better in navigating the challenges.

How Does Fastenal Company (FAST) Stack Up Against its Peers?

While FAST has an overall C (Neutral) rating in our proprietary rating system, one might want to check out its industry peers with A (Strong Buy) ratings: LSI Industries Inc. (LYTS), Finning International Inc. (FINGF), and Kadant Inc. (KAI).

FAST shares were unchanged in premarket trading Thursday. Year-to-date, FAST has gained 15.58%, versus a 20.86% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

More...