Industrial supplies wholesale distributor Fastenal (NASDAQ:FAST) outpaced the broader market by a wide margin in 2019, as shares raced higher by 41% against the S&P 500 index's gain of nearly 29%. The company reports on its final quarter of 2019 on Jan. 17 before markets open for trading. Investors will pay special attention to this report, as it will set the tone for Fastenal's share price performance in 2020, but also because the company's operations give us some insight into the current health of the manufacturing and construction industries. Below, let's review what the report might tell us about Fastenal's results -- and the broader economy in general.
Sales numbers and installation signings
Fastenal's share price ascent last year was fueled in part by vibrant sales growth. Through the first three quarters of 2019, Fastenal booked $4.1 billion in revenue, translating into year-over-year top-line growth of 8.7%. Revenue advanced by nearly 8% in the third quarter over the comparable period, to $1.4 billion.
Will this sales momentum continue? We already know that the company experienced a curbing of its growth rate in two of the last three months of the year, as Fastenal has released its October 2019 and November 2019 monthly sales reports (December's report will be released simultaneously with earnings on the 17th).
In October, total sales increased by 4.3% over the prior year, while Fastenal's key metric of daily sales (total sales divided by the number of days in the month) also advanced by 4.3%. In November, sales rose by 0.7%, but this was mostly attributable to the period's 20 business days versus 21 days in November 2018. Daily sales in November improved by 5.7%.
Both reported sales and daily sales are tracking below the sales growth of the first nine months of 2019, so the suspense is building on how much December might improve or further dilute the two-month trend.
Investors will also scrutinize two other important metrics in the earnings release: the number of industrial vending machines Fastenal signed for placement in customers' worksites during the third quarter, and the number of Onsite inventory fulfillment locations it signed with customers.
In the trailing 12 months ending in September 2019, Fastenal increased its total installed vending machine count by 12.2%, to approximately 88,000 units. However, during the latter part of 2019, management noted that "slower economic activity" was lengthening the sales cycle for its vending machines.
Thus, management reduced Fastenal's full-year 2019 vending sales goal from a range of 23,000-25,000 units, to 22,000 units. As I discussed in my earnings recap from last quarter, this is still a healthy target. The organization had clinched signed agreements for roughly 16,700 vending machines through the first nine months of 2019.
As for Onsite locations, Fastenal signed 283 new locations in the first three quarters of 2019, with a goal of hitting 375 to 400 signings by year-end -- an ambitious goal. The company counted a total of 1,076 of these on-premise inventory centers at the end of Q3 2019.
Industrial vending machines and Onsite locations are Fastenal's two biggest growth drivers, and a rush of signings at year-end will likely bolster shareholder enthusiasm, even if the total pace of revenue growth indeed slows in the fourth quarter. Conversely, lackluster revenue numbers coupled with weak customer signings could spur profit-taking in this industrial sector investment. Given the company's huge share price run-up last year, investors shouldn't be surprised it Fastenal gives back a few percentage points of its stock gains if releases only moderately improved earnings.
Following the bigger picture
Fastenal's fourth-quarter 2019 earnings report will be utilized by some market watchers as an early data point on the health of the U.S. economy. With its huge installed base of tens of thousands of vending machines, and continuous order flow deriving from two vital industries (manufacturing and construction), the company can be seen as a proxy for waxing or waning business demand. A pickup in sales coupled with healthy vending and Onsite signings will give investors useful information to supplement upcoming readings of the economy.
On the other hand, a weak quarter from Fastenal, one that builds on the company's cautious note of slower economic activity in the latter half of 2019, may signal to some investors that it's not too early to begin worrying about a possible recession later this year. The takeaway from such a report should be a resolve to monitor the earnings of similar economic bellwethers as they begin to release year-end 2019 earnings over the next few weeks and to pay close attention to early 2020 macroeconomic reports. Key domestic figures to track in this scenario include U.S. manufacturing output, labor expansion, and, of course, the all-important metric of gross domestic product (GDP) growth.