As a supplier to industrial and construction businesses, the performance of Fastenal Company (NASDAQ:FAST) can be a good way to look at the overall health of the manufacturing sector. If its business is strong, it is likely that portends positive results from its customers, as they continue to consume critical items to run their operations. Fastenal's biggest single product line is fasteners, which made up 34.2% of 2019 sales. But it also supplies general and specialty tools, safety items, and electrical, welding, and even janitorial supplies. 

So its recent earnings report should be a good way to see how the effects of the ongoing COVID-19 pandemic may be beginning to influence manufacturing businesses. But digging into the details shows that a strong report from the supplier could be a deceptive signal.

manufacturing icons of tools, gears, workers, testing equipment

Image source: Getty Images.

A deeper dive

On the surface, the company had a solid earnings report, with 4.4% net sales growth versus last year. The company said growth continues to come from its investment initiatives in industrial vending and Onsite locations, as has been the case in recent years. 

It noted, however, that the results were also driven by "increases in certain products later in the quarter related to the coronavirus pandemic." Its biggest product line, fasteners, actually declined on a daily sales basis versus a year ago. Sales of its safety product line really drove the business, increasing 18.4%. 

Product Line Q1 2020 Sales (%) 2019 Sales (%)
Fasteners 32.9 34.2
Safety 19.8 17.9
Cutting tools & other supplies 47.3 47.9

New normal for businesses

This shift in the business is likely telling as to what we will see from industrial companies this earnings season. Safety supply sales have been expanding for Fastenal, but not quite at the rate seen this quarter. Since 2017, this product line grew by 15.5% annually.

So while the recent jump in sales is good for Fastenal, it doesn't bode well for its customers. These are likely not consumables that directly contribute to manufacturers' earnings, but rather ones that are becoming an added necessity -- and added cost -- in today's environment. 

Fastenal described business activity as "sluggish" through the beginning of March. But it said that "the second half of March saw activity levels weaken significantly in response to societal actions meant to address the coronavirus pandemic." In illustrating the shift in its customers' businesses, the company reported that in March alone, fastener daily sales actually dropped 10.1%, while safety supply sales increased 31%, mainly from personal protective equipment (PPE).

Additionally, sales to the government sector increased 31.1%, with sales to healthcare organizations more than doubling. At the same time, sales to manufacturers and residential construction dropped. 

Moving forward

Fastenal has been seeing success in recent years from its main growth drivers: vending devices and Onsite locations. Vending provides point-of-use dispensing, storage, and delivery for customers to manage inventory more efficiently and save costs. Onsite locations are another initiative designed to improve the ease of doing business and build more loyalty in customer relationships. 

Both have shown positive results, with installed vending devices growing 10.4% year over year for the first quarter, to a total of over 92,000 units. Onsite locations grew by 24.8%. However, the company did withdraw its growth guidance for both items for the remainder of the year amid the uncertainty brought by the pandemic.

While portions of its business are hurt by the economic slowdown, Fastenal's quarterly results show that the safety supply segment will help carry it forward. Unfortunately, the slowdown in fastener, cutting tool, and other non-safety equipment sales is likely to mean that upcoming quarterly results from its customer base of industrial and construction companies will show material weakness in the manufacturing sector. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.