Fastenal Co.
Fast Products 3

Fastenal Leaders: Manufacturing Economy Still ‘Fairly Tepid’

Oct. 13, 2023
But CFO Holden Lewis tells analysts he’s encouraged by suppliers’ inventories and the lack of year-end discount offers.

The manufacturing economy isn’t preparing to roar in 2024, executives of parts distributor Fastenal Co. said Oct. 12, but there are some bright spots and signs that factory owners have a firm hold on their operations.

Speaking to analysts after Minnesota-based Fastenal reported third-quarter profits of $296 million on sales of more than $1.8 billion (both figures were up slightly from 2022’s Q3), CEO Dan Florness and CFO Holden Lewis told analysts nothing much has changed from their vantage point since they reported second-quarter results.

“I think aerospace is doing fairly well. I’m not getting a lot of feedback that anything else is really inflecting more favorably,” Lewis said. “I’m getting the feedback that everything else remains fairly tepid. […] Managers across our business are fairly cautious on where the market is today.”

That observation jibes with several high-level indicators: Year to date, new orders for manufacturing goods are up just 1.0% while new orders for capital goods have climbed 1.3% since the end of 2022. Similarly, the ISM Manufacturing Purchasing Managers’ Index has been in contraction territory since late last year but ticked up to 49.0 in September, hinting at a factory economy that is finely balanced but—carefully—trending higher. Similarly, machine tool demand is showing signs of improvement.

Florness and Lewis also relayed some mildly upbeat anecdotes Oct. 12. Florness noted that demand from transportation customers is driving Fastenal’s business in continental Europe higher—although the company’s team there is “being very, very cautious about not getting ahead of anything.”

Lewis, meanwhile, leaned on the absence of something to feel encouraged about what’s ahead in the coming months: When things aren’t great, he noted, Fastenal’s suppliers will regularly serve up discount offers to clear their inventories and normalize production rates heading into the new year.

“It’s still early, and we don’t know what December is going to look like in many respects, but we haven’t seen as much activity from our suppliers inquiring about our willingness to enter into those kind of year-end types of deals,” Lewis said. “A lot of our suppliers might have inventories that are pretty close to where they need to be. […] I’m probably feeling somewhat encouraged about where the inventory levels within and throughout our supply chain are getting to.”

Other items of note from Fastenal’s Q3 report included:

The pending departure of COO Terry Owen, who is leaving the company at month’s end for another, as-yet-undisclosed job. Owen has been with Fastenal for nearly three decades after starting in a part-time role.

The signing of 93 contracts to open locations inside or near customers’ plants, a number that’s on pace with the lowered 350 full-year target Florness and his team guided to three months ago. It remains a priority to push that number, Florness said: “Looking at the opportunity that’s out there, I believe we can do that. We need to turn that belief into a reality.”

Daily sales growth of more than 41% through the company’s e-commerce platform, which now accounts for about a quarter of all sales. “Our team in the field and our team in technology [are] building an ever better mousetrap to serve into that market,” Florness said.

Shares of Fastenal (Ticker: FAST) popped on the Q3 report and were changing hands around $60.35 on the afternoon of Oct. 13. Over the past six months, they have risen roughly 15%, growing the company’s market capitalization to more than $34 billion.

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