What happened
Shares of industrial parts supplier Fastenal (FAST 0.27%) jumped roughly 14% in May according to data from S&P Global Market Intelligence. That easily beat the 5% or so advance of the S&P 500 index during the month. Over the first five months of the year, Fastenal's stock was up by 11% versus a 5% decline in the S&P. There was, however, a sizable COVID-19 related dip in late February and March. Yet, when you look at the numbers, the big fears investors had about Fastenal's business never really materialized.
So what
Fastenal reports monthly sales, which is really helpful in seeing just how bad the COVID-19 headwind was for its business. The surprising thing is that the company's top-line growth has actually improved since the coronavirus started to spread. Sales increased 3.6% in January, 4.7% in February, 5% in March, and 6.7% in April. Based on these results, it looks like Fastenal actually benefited from the economic shutdowns related to COVID-19.
Image source: Getty Images.
That's not exactly true, since Fastenal's parts business saw a material drop in sales in April. The thing is, the company's efforts in recent years to diversify into safety products has proven a huge benefit. Demand in this business line more than doubled in April as companies looked to deal with COVID-19 health concerns. That huge gain more than offset the decline in the company's core business. In other words, investors were probably correct to be worried about Fastenal. However, with the benefit of the safety business, Fastenal has proven resilient to the current health-related headwinds. Investors have rewarded it for that.
Now what
Although Fastenal has managed to do quite well through the COVID-19 pandemic, this story is far from over. The weakness in the company's parts business is the piece that should be most worrying. It's highly likely that the efforts to contain the coronavirus will lead to a global recession. And, at its core, Fastenal is a cyclical business, so an economic downturn will mean continued headwinds. There's really no way to tell how long the safety segment can continue to offset the hit the larger parts division is experiencing. Long-term investors should go in with an eye on the horizon, because there are still some storm clouds brewing.
