Shares in industrial supply company Fastenal (NASDAQ:FAST) soared 41.3% in 2019 according to data provided by S&P Global Market Intelligence. It was a truly remarkable occurrence, not least because most of it comes down to internal execution.
In a year when U.S. industrial production came in lower than most of the expectations going into it, Fastenal managed to generate high-single-digit sales and operating income growth largely based on its strategy of expanding onsite locations, e-commerce sales growth, and placing industrial vending machines.
There's a useful snapshot of the company's progress on its strategic initiatives in the third-quarter earnings figures:
- Onsite locations increased 30% year over year to 1,076.
- The installed base of vending machines increased 12.2% year over year to 88,327.
- Third-quarter e-commerce sales increased 28% compared to the same period a year ago.
The end result was a 7.8% year-over-year increase in sales in the third quarter and a 7.4% increase in operating income. Fastenal is still a growth stock.
Fastenal's results in 2019 are very good, especially when you consider the headwinds it's faced from a slowing industrial economy, cost increases emanating from tariff actions, and the threat from online competition.
As you can see below, the company's year-over-year growth rate has slowed as a consequence of weakness in the industrial economy, but Fastenal still remain firmly in positive territory. For reference, industrial supply companies have what economists call short-cycle sales. This means there's a short lead time between initial contact and the generation of a sale, so when industrial production starts to slow, industrial supply companies will be hit first.
With Fastenal having demonstrated it can grow even in a slowing environment -- indeed, a slowdown could lead to a scenario where it grabs market share from smaller distributors -- the key question is what kind of assistance the company can receive from the economy in 2020?
The question is subject to debate. Bulls will argue that the slowdown is largely a consequence of issues that can be rectified in due course, such as the trade conflict and a natural slowing in transportation markets (automobile and truck sales). In addition, the underlying economy remains in good shape with falling unemployment, low interest rates, and solid housing markets.
Meanwhile, bears will point out that the current trend in the industrial economy is negative, Europe remains in an anemic growth mode, and there's no shortage of geopolitical issues to worry about right now.
If the bulls are right, there should be an improvement in the industrial economy at some point in the middle of 2020 -- something that could lead to a much brighter outlook for Fastenal's earnings in 2021.