Shares in industrial and construction wholesale distributor Fastenal (FAST 0.40%) fell 11.5% in January, according to data provided by S&P Global Market Intelligence. It's not been a good year for the stock. Indeed, it's down 14% on the year at the time of writing.
The reason for the fall probably comes down to the same negative sentiment that caused the broader market sell-off in January. Investors are worried about a plethora of things right now. If it isn't rising supply chain costs eating into margins, it's increasing raw material costs. If it isn't the resurgence of the coronavirus over the winter, it's the prospect of rising interest rates slowing the economy.
Those concerns have come together to cause investors to sell the stock in 2022. Given that Fastenal is a distributor of fastener, safety, and other products to the manufacturing and nonresidential construction industries, it's always going to be seen as a bellwether of the industrial sector in the U.S. That's a good thing when the growth outlook is improving, but not so great when investors are worried about the economy. Thus, it's no surprise to see the stock sell off when investors are fretting.
That said, there wasn't much in the company's fourth-quarter earnings (released Jan. 19) or its recent January sales update to worry investors unduly. Costs are inevitably rising, but according to CFO Holden Lewis on the earnings call, "Higher pricing continue to largely match higher costs, yielding a neutral price cost in the fourth quarter of 2021." In other words, Fastenal is managing to pass through cost increases to customers.
Moreover, sales growth remains strong, and Fastenal continues to expand profit margins. For example, year-over-year average daily sales growth was 14.6% in the fourth quarter and the company ended the quarter strongly with average daily sales growth of 16.5% in December. In addition, average daily sales growth was 14.9% in January.
Turning to margins, the company's strategy of growing the business by closing branches and shifting toward on-site locations continues to pay off with operating margin expansion. At the end of 2019, the company had 2,114 branches with 1,114 active on-site locations. However, at the end of 2020, the branch count dropped to 1,793, with active on-site locations now up to 1,416.
Meanwhile, operating margin expanded to 19.6% in the fourth quarter of 2021 compared with 19.5% in the same period of 2020 and 18.7% in the same period of 2019.
Investors will be hoping Fastenal carries on being able to pass through costs and generate profit margin expansion on solid sales growth. Trading on 31 times its estimated 2022 earnings, the stock isn't exactly cheap, but the company's growth strategy is working, and the long-term future looks bright.