Fastenal
Sup, mother fucks, it's Gabe Azar, Managing Director and Head of Burrito rolling of the infamous Azar Capital Group. Your grandma's favorite investor. Currently writing to you nerds from my L desk. Today I am writing about Fastenal. Now sit back, you greasy bastards, and enjoy. And remember, buy low and sell high, my friends.
Founded in 1967, Fastenal is a wholesale distributor of industrial and construction supplies. Fastenal began by building out a strong retail branch strategy, reaching over 2500 locations by 2016. Now they have begun working on part two of their plan by launching Fastenal Managed Inventory (FMI) and on-site locations embedded directly within customer facilities. Fastenal is currently transitioning from a traditional distribution model to an industrial supply chain platform. These aren’t small changes for Fastenal, but an architectural change that shifts how the company's moat is configured. Switching from a fully brick-and-mortar-based model to a digital lock-in and data network effects. The market is still pricing Fastenal as an industrial distributor, although it is becoming an operating system for industrial procurement.
Fastenal’s management team has stated that its strategy is focused on three core objectives that include increasing sales effectiveness, enhancing its services, and expanding TAM. Fastenal’s objective for increasing sales effectiveness is to land new customers with higher monthly spends. In their most recent quarterly report, they noted that there was an increase in 14% YoY growth in customers that spent more than $50k monthly. That represents $1.08 billion in quarterly revenue from 2,657 locations. Increase spend also creates high switching costs that are similar to enterprise software levels. On the increased effectiveness front, the company's focus is to expand FMI deployment and integration. Management stated that their goal is to sign 30,000 weighted machine equivalent units; this will be a big jump from their 26,000 in 2025. Each of these installed units creates a strong data stream that feeds the company’s inventory. As these numbers increase, Fastenal is able to build consumption patterns across thousands of customer sites that are very hard to replicate from scratch. On the TAM expanding side of things, management hopes to capture more than $15 billion in revenue and more than 10% market share gains.
Several major short-term catalysts include turning new customers into realized revenue, the ever-changing pricing environment, and gross margin recovery. Contracted customers currently represent just about 75% of revenue, up from 72% in Q4 2024. Management noted that there is a several-quarter lag between signing new customers and full revenue recognition from those customers. Pricing in Q4 2025 saw a 3% in growth despite tariff uncertainty and inflation. Fastenal has strong pricing power with its large customers. Pricing optimization would lead to a third catalyst of margin recovery and expansion. Gross margins saw a very small contraction from Q4 2024 to Q5 2025. This was driven by inventory-related COGS, supplier rebates, and minor price/cost negativity. Management believes they will see margins recover by the second half of 2026.
In the longer term, management has set several goals that include a shift in capital allocation, enabling the recovering manufacturing sector (reindustrialization), and an increased digital footprint. Fastenal set a goal to increase its digital footprint to 66%, versus its current 62%. With this increase, they would see a lower cost to serve customers, higher retention, better pricing, and more data to feed their algorithm. With the rise in companies reshoring their manufacturing, Fastenal believes that it will gain market share and increase operating leverage. Fastenal generated in $1.29 billion in operating cash flow in 2025 and returned $1 billion of that in dividends. Management also plans to increase CapEx for hub network optimization, trucking fleet, and IT infrastructure. Management has stated that they are committed to a disciplined capital deployment strategy.
Despite kicking ass, Fastenal is still exposed to structural and cyclical risks, including customer concentration, gross margin headwinds, exposure to tariffs, and its ongoing technology transformation. While switching costs are high with deep integration into customer supply chains, a single large customer loss would be visible. Management noted thatlarge customers generate high volume but at lower gross margins. This is why the lads are focused on landing more small to mid-sized customers. Fastenal sources its products globally, which has now exposed them to the ever-changing tariff game. Management noted in its recent earnings report that “tariffs and general inflation led to increased inventory valuation.” This has created three separate risks: direct COGS inflation, demand, and working capital pressure if customers pre-bought inventory before tariff implementation. Fastenal is also focused on expanding its FMI business, aiming to sign 30,000 MEUs by the end of 2026. This represents 16% growth from 2025 numbers.
Fastenal separates its product portfolio into two separate core segments: direct products and indirect products. Direct products are materials and products that can be directly linked to finished goods. Indirect products include materials that cannot be tied to finished foods. Fastenal’s direct products portfolio represented about 38.4% of Q4 2025 sales. This is up YoY due to Fastenal’s fastener project, which optimized SKUs and supplier relationships. Fastenal’s indirect product portfolio represented 61.6% of Q4 2025 sales. While this category represents a larger portion of total revenue, it is growing at a slower rate due to softer demand in maintenance and facilities spending and manufacturing customer outperformance, which drives direct product demand. Management also noted that “hydraulics/pneumatics, cutting tools, and material handling also outpaced total company DSR.” This indicates that the FMI integration is successfully expanding.
Fastenal's geographic footprint spans across North America and some international markets. The company reported that 94.5% of its revenue is derived from North America and only 5.5% from international markets. Its business in the United States represents 83.7% of revenue based on its most recent report. A majority of this revenue comes from heavy manufacturing like automotives, aerospace, and industrial machinery. The Mexican and Canadian markets saw slight growth as well due to the strong company presence in Canada and U.S. companies building out manufacturing capacity in Mexico. Revenue from the rest of the world also grew YoY nicely despite currency headwinds. The company's international footprint includes 105 European locations and 51 locations across Asia.
Over the past few years, Fastenal has cracked the code that led to several inflection points that include a customer site disclosure enhancement, growth in the manufacturing sector, a stock split, and the growth of its FMI business. Fastenal segments its customer sites by their monthly spend, which provides transparency to its business quality metrics. The heavy manufacturing category saw minor growth, although this segment is Fastenal’s highest volume market. While industrial production remains soft, Fastenal holds a strong market share. The company also saw its first positive quarter in a long time in its non-residential construction segment, with construction representing 8.1% of Q4 2025 revenue. The FMI installed base also crossed 136,000 MEUs, which creates strong network effects in data, predictive analysis capabilities, and vendor leverage. Fastenal’s digital footprint now represents two-thirds of the company's revenue. These digital channels enable algorithmic pricing, predictive inventory optimization, automated reordering, and usage-based insights that traditional distribution retailers cannot match.
The industrial distribution industry generates over $400 billion in annual revenue across North America. Despite years of M&A and consolidation, the top 20 distributors only control 45% of the market share. While the remaining 55% is cut up by an estimated 15,000-20,000 regional distributors, specialists, and local operators. This fragmentation stems from three core characteristics: industrial supply relationships that aren’t easily transferable, last-mile delivery, and product taxonomy. The industry is also segmented into three competitive tiers, all of which have different business models. The top tier comprises 12 national/multinational distributors investing heavily in technology infrastructure and integrating with customers' ERP platforms. The middle tier includes about 200-300 regional players with revenue ranging from $50-500 million that operate as traditional sales-driven models. While the bottom layer consists of thousands of highly specialized and hyper-local operators that serve niche applications or concentrated geographies.
Key industry segments serve five major customer industries, each of which has its own purchasing behaviors, margin structures, growth dynamics, and recession sensitivities. The heavy manufacturing represents 32% of the industry volume; these customers load up on production-critical supplies. This group is highly sophisticated, with vendors tracking time delivery, quality defects, technical support responsiveness, and total cost of overnship rather than just cost per unit. The light manufacturing and assembly holds about 36% of the industry volume with more stable demand and a differentiated product mix. These customers purchase more indirect supplies, with purchasing decisions focused on reliability, convenience, and consolidation rather than technical expertise.
Commercial and industrial construction represents 14-18% of the industry volume with highly variable projects. Customers in this segment have very different purchasing patterns than the lads in the manufacturing sector. Each project is built on relationships, pricing sensitivity due to bid-based economics, and delivery timing is critical because delays can kill schedules and increase costs. Government, institutional, and healthcare are about 9-13% of industry volume. The purchasing process for these segments is a lot more formal than the rest, with it requiring bids, price transparency, certifications, and socioeconomics set aside for smaller players. These requirements often favor different distributor characters than traditional commercial markets. Then there are emerging and specialty verticals that include data centers, renewable energies, and EV charging networks that collectively represent 6-10% of the industry. Although this segment is growing quickly and requires specialist knowledge. Data Centers are a major opportunity, as each hyperscale facility requires $10 million in industrial supplies during construction and $2 million in annual costs to keep things moving.
Several macro-level forces are snowballing trends for the industrial network that will compound over the next 10 to 15 years. Deglobalizing/reshoring and supply chain reconfiguration are the most significant shifts since the offshoring wave. The pandemic exposed massive vulnerabilities that spanned the global supply chain with shortages in the most critical industries. This revealed how fragile supply chains really were. Demographic and labor market dynamics are also creating strong demand for industrial products that will increase workers' productivity and enable the aging workforce to stay productive for longer. The median age in U.S. manufacturing has reached 47 years, with over 40% of skilled trade workers as old as 55. Younger cohorts have shown minimal interest in these sectors despite strong pay. Since 2000, apprenticeship programs and community colleges have struggled to fill slots for machining and welding programs.
Regulatory expansion and compliance also create product openings across safety, environmental, and industry-specific domains. OSHA workplace safety regulations are expanding, and annual citations have grown over the past 15 years. EPA emission standards, wastewater limits, and hazardous material handling are also increasing, creating immediate demand for compliance supplies. The economics of these mandatory compliance products are fairly predictable, unlike other market categories. This also enables companies to sell these products at a slight premium to maintain strong gross products in the 45-50% range versus 38-42% for general MRO products. Each regulatory wave could create 10 years of demand for businesses be compliant. Specific areas in this include mental health, substance abuse programs, pandemic preparedness, and climate adoption.
The technology infrastructure buildout across telecom networks, data centers, EV charging infrastructure, and renewable energy products whic is creating an entirely new category with yuge growth rates. Data center construction is being built out at an unprecedented rate, being driven by cloud computing growth, AI shenanigans, and edge computing growth. The highly specialized requirements for data center products create high-margin opportunities, with any downtime costing $5,000 to $15,000 per minute. Companies that establish strong relationships with data center operators will capture strong wallet share as the operators standardize their building process. The EV charging infrastructure is also growing at a fast pace, with the Infrastructure Investment and Jobs Act dedicating $7.5 billion, and private investment adds another $30 billion to build out charging networks. With each level 3 charging station requiring $20,00 in non-charging related industrial supplies, this vertical could reach $3 billion annually.
Long-term policy and fiscal dynamics are creating both positive tailwinds and risks for the industrial demand over the next 10 years. While tens of billions of dollars are currently being invested and appropriated to these verticals, this growth rate won't last forever. This creates an unusual alignment between semiconductor subsidies, infrastructure spending, and manufacturing incentives. Recently, interest payments on federal debt have increased the share of the budget, which could potentially create trade-offs between priorities. However, many of the policy programs have bipartisan support that other programs lack.
Smart inventories and the Internet of Things have gone extremely mainstream, which is changing how customers manage their supplies, optimize logistics, and where they can create value within their supply chain. Advances in weight sensors, RFID tags, optical scanners, and tools that can capture every transaction in real time have created new recurring revenue opportunities that are based on production schedules. This order flow enables distributors to create strong network effects where each installation improves backend algorithms. This creates a strong competitive edge that compounds over time. Long-term winners within the distribution game will have to integrate with customer ERP systems and provide predictive analytics that transform how work is done.
Digital marketplaces are reshaping purchasing behaviorsm customer dynamics, but create relationship selling, and last-mile logistics requirements. Traditional distributors have grown their business thanks to these marketplaces but have lost wallet share from Amazon due to indirect supplies like office supplies, janitorial products, and general goods that require no expertise and adds minimum value. This does open a valuable opportunity for the industrial suppliers to serve their core product categories and segments through high volume and touch models versus low-cost digital channels. Third-party marketplaces are creating long tail products from multiple suppliers that enable customers to source products without needing to maintain relationships with dozens of niche distributors. The increased investment in digital marketplaces has also significantly increased demand for supply chain visibility and more technology integration tools to improve transparency within a company's supply chain.
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Like most industries, the industrial distribution sector has several large players that cover national players, while smaller regional players serve more niche and specialized markets. Fastenal’s primary competitor is Grainger, a $17 billion revenue giant. Grainger operates as a category leader in MRO distribution with over 1.5 million SKUs compared to Fastenal’s 500k SKU catalog. Grainger also has a more sophisticated digital commerce platform and strong fulfillment centers. Grainger has built a home depot for industrial companies, offering next-day delivery and a very large product selection. Despite having a smaller product portfolio, Fastenal dominates the planned consumption and vendor-managed inventory segment. Fastenal likely holds an 8-12% market share, while Grainger holds around 12-15% of the market. MSC Industrial Direct is a third major player, though its core focus is on metalworking and manufacturing customers that need precision tooling and measuring instruments.
Beyond the major few players, the landscape fragments into tons of regional players, vertical specialists, and local operators that serve about 60% of the market share. Smaller players are feeling an increased amount of pressure as customers consolidate their suppliers to maximize supply chain efficiency. Historically manufactures have purchased products from 20+ distributors, and they are now targeting fewer than 10 major strategic partners. This is a major benefit for Fastenal as they provide product coverage, tech integration, and excellent service across factories. The small hounds can survive by pivoting from providing everybody with gear to capturing demand from specialized niche players where the scale of the large players doesn’t matter. Amazon is also an underscouted threat, as customers may use Fastenal for critical supplies but will use Amazon Business for non-critical purchases like office supplies.
Fastenal’s data network is an underappreciated strength; network effects from its FMI install base create strong competitive advantages as the system scales. Fastnel has over 140k machine equivalent units across thousands of custom sites, which are continuously monitored to improve the accuracy of demand, inventory optimization, and predictive restocking across facilities. This is a major advantage in the world of atoms. Fastenal’s algorithms can predict with accuracy when a customer will experience product shortages. With over 140k FMI units deployed creates a massive barrier to entry for new players to compete in this segment. Fastenal also has a physical network advantage as they operate over 1500 branch locations and over 1700 onsite locations that are embedded within customer facilities, as well as 14 regional hubs that enable same-day delivery.
New entrants face extreme barriers to entry with capital requirements exceeding several hundred million dollars to build out a national distribution platform, branch networks, inventory, and technology infrastructure. The size of these investments would require well-capitalized existing businesses, like a foreign distributor entering the US market or private equity-backed roll-ups, rather than venture-backed startups. Regional players have been jumping into the scene to specialized and niche operators. New entrants also face lots of regulatory, legal, and compliance requirements to service certain markets like aerospace, defence, medical devices, or pharmaceuticals. These sectors require lots of quality certifications and other nonsense that requires lots of investment in compliance infrastructure. Customer relationship barriers also protect incumbents, as a maintenance supervisor builds trust with a Fastenal rep and can trust their technical capabilities.
Over the past five years, Fastenal has been able to successfully navigate many storms with accelerated growth in revenue. The company reported full-year 2025 revenue of $8.2 billion, reflecting 8.8% YoY growth. This strong growth emerged from strong pricing power, which created an increase in market share. Fastenal saw major growth in customer sites, with customers spending $50,000+ monthly, and this segment grew 14% YoY. Fastenal can successfully operate two business segments, one is a high-value enterprise platform that's embedded into customers' supply chain, while the other is a fragmented SMB distribution. Full-year gross margins in 2025 were 45%. While operating margins were 20.2% in 2025, up slightly from 2024. SG&A also increased as base pay and bonuses increased. Net income saw an increase of 9.4% versus 2024, 2025 full year income reacher $1.25 billion. Diluted earnings per share grew 9.2% in 2025; growth has been delayed due to increased stock-based competition.
Fastenal has an extremely strong balance sheet, with little leverage, strong liquidity, and growing assets. Total assets reached just over $5 billion by the end of 2025, which was a slight 7.6% growth YoY. Cash and equivlenets was a reported $276 million, a modest increase from $255 million in 2024. Fastenal operates with low cash balances due to the high operating cash flow. The company also prioritizes returning cash to shareholders and investing in growth instead of stacking cash. Total inventory grew as well, with management noting that they indeed have inventory to support projected growth and pre-tariff and pre-inflation buying. As tariffs remain on a rollercoaster, Fastenal can hedge inventory costs, which could improve short to medium term revenue. On the debt side of things, Fastenal is looking good. They have a total debt of $125 million, which declined from $200 million in the year prior.
Fastenal’s return on invested capital reached 31% as the company has been able to capture returns from supply chain efficiencies. This ROIC is slightly above industry peers, showing that Fastenal is able to improve returns during slowed growth periods. Although a major risk is whether Fastenal can keep these numbers going or if competition increases, customer shifts, and capital intensities return to normal. Fastenal’s REO is around 34%. Show operational excellence rather than just pure financial shenanigans. Fastenal’s management has noted that its goal is to distribute 80% of these earnings to shareholders via dividends, which limits reinvestment.
Fastenal’s ability to generate cash flow is one of the company's most underappreciated moats. This FCF enables the company to invest in growth, infrastructure, and shareholder returns without requiring any external financing or raising more debt. Fastenal’s full-year operating cash flow in 2025 was $1.29 billion, reflecting low working capital, predictable revenues and depreciation on their assets, and a disciplined capital allocation strategy. Zero capital went to share buybacks, which reveals Fastenal is more focused on dividend growth, and reinvesting in growth takes priority over returning incremental cash to shareholders.
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Fastenal’s organic growth over the past few years has been on fire, though they have been focused on deepening wallet share within existing customers. In Q4, Fastenal reported revenue of $1.66 billion from over 11k customers that spent over $10k a month. There is a massive opportunity in the $10k-30k monthly spend range is massive for Fastenal as they embed themselves deeper into customer supply chains. Fastenal has noticed that when they deploy their FMI machines to lower spend customers, they see an increase in spend after 6 to 12 months. This increase in wallet share can tremendously increase revenue over a several-year period. If 1000 accounts increase their monthly spend from $25k to $50k over a several year period, that could create several hundred million in new revenue. Product expansion is another major opportunity for Fastenal, with 47% of its revenue stemming from cutting tools, material handling equipment, janitorial supplies, electrical components, welding supplies, and more. Increasing sales in these segments would vastly increase Fastenal’s total revenue over time (no shit). Although Fastenal doesn’t need to reinvent the wheel with crazy products, they just need to drive growth with existing customers.
Pricing power is another organic growth driver, based on three core factors: inflation justification, tariff cost recovery, and value-based pricing. Fastenal believes it will be able to benefit from these factors for the next few years. If Fastenal is able to save its customers several hundred thousand dollars per year through FMIs' system, customers will accept small annual price increases without too much whining. One of Fastenal's largest moats is its network size, something that would cost upwards of a billion dollars plus many years to build out. That would also require building a huge client list, all while Fastenals continues to cook. Switching costs are another benefit for Fastenal, as when a client installs Fastenal's FMI devices and integrates them with their EPR system, switching costs increase massively. Not only financial costs but time as well, due to the training, workflow changes, and reorganizing inventory levels.
Geographic expansion is another growth lever for the company, with the company's largest presence in North America. With a massive majority of its facilities in the U.S and a small and smaller presence in the rest of North America, Europe, and Asia. The international markets present the highest growth potential for Fastenal. Mexico is a major opportunity for Fastenal as companies begin to invest heavily in reshoring their supply chains within North America. Europe and Asia represent a small opportunity for Fastenal due to strong competition and regulations. We believe that Fastenal is better off selling its assets in Europe and Asia and reinvesting the capital across North America.
Vertical integration into high-growth sectors like data centers, EV infrastructure, semiconductor fabs, and renewable energy sources creates a massive opportunity for Fastenal. Data centers offer an excellent opportunity for Fastenal, with each facility requiring several million in supplies during construction and $1-2 million annually for upkeep. With hundreds of data centers being planned and built, Fastenal has a major opportunity to secure a portion of this market and generate massive revenue from this segment alone. Entering these markets will require some ball knowledge, technical training, and reference accounts that Fastenal can show to prove that they know ball and can operate in the space. This, along with building relationships with the data center operators, will take time but will lead to serious capital gains if properly executed.
Fastenal’s acquisition history is sparse for a company with such a bangin balance sheet. This shows that management is focused on organic growth over inorganic growth. Although they have made rare acquisitions, but mostly just been small regional players. Nothing exceeding $100 million in size and nothing that transforms the company's business model. Most recently, the company required Av-Tech Industries, which was a bolt on acquison to give them more exposure to the space, aviation, and defense industries. This is a major value-add acquisition as it gives them instant access to qualified suppliers, customers, and technical talent that may be hard to hire. Larger acquisitions could be coming soon, as tons of regional owner operators may be looking to retire and sell their business. Another challenge with acquisitions for Fastenal is that the companies they may want to acquire often trade at a high premium due to their defensible market positions.
Technology acquisitions represent a major opportunity for Fastenal. If the lads could find industrial tech startups in the inventory optimization, predictive maintenance, or procurement automation tools, Fastenal could pounce. An acquisition in this area could save Fastenal time and money (shoutout to ramp), making it logical and compelling if the integration challenges can be met. Fastenal could easily drop 1 to 2 bills towards M&A without increasing leverage or hurting dividend growth. This is a major opportunity for Fastenal to acquire within the technology space. Management should search for companies that have capabilities that would take years to build or cannot be built organically. Joint Ventures could even be in the picture as they could lever growth without the headache of an M&A integration. Partnerships with IoT providers, procurement tools, or EPR vendors could accelerate digital transformation.
With the increased amount of investment we are seeing within the manufacturing sector, Fastenal could gain significant market share over the next few years. Industries across the game have all committed to investing several hundred billion dollars in reshoring their supply chains and building out new semiconductor fabs, EV infrastructure, batteries, and whatnot. Fastenal's extensive branch network already serves the major markets where these projects are likely to be built out. This positions Fastenal as an excellent choice for companies to use as their supplier. Unfortunately, regulatory expansion offers a major revenue opportunity for Fastenal, with each new OSHA standard generating $50-200 million in potential revenue for players across the industry. While the boys over at Azar Capital Group hate overregulation, we believe revenue is revenue.
Fastenal operates mostly as a distributor rather than a manufacturer, with only a couple of percent of its revenue coming from manufacturing. A manufacturing expansion plan would take several years and a massive investment, which would place them in direct competition with a bunch of the company's suppliers. Management has shown no interest in making these moves, so that's sweet; they recognize their strong suit resides in the distribution layer. Fastenal has been a busy bee investing in capacity expansion with a 2026 guidance of $310-330 million. This includes a new hub in Atlanta and continuous investing across its locations for capacity improvements. They are also investing in automation tools that will reduce labor costs and improve accuracy.
Fastenal's technology pipeline is a major opportunity for the company, though it will require large investments annually. These investments will be made in software development, data science, algorithm refinement, and enhancements to the company's digital platform. This requires at least a hundred million to be invested, but it will provide customers with usage insights and cost optimization, which could lead to higher monthly spend. A risk in this area is underinvesting in technology relative to their competitors. Fastenal doesn’t disclose its R&D, but estimates are around 2-3% of revenue. While this is currently sufficient to maintain their competitive position, other distributors may go big on R&D investments over the next few years instead of investing in their facilities to capture any potential AI juice.
Fastenal’s supply chain represents one of its largest moats, enabling it to offer same-day delivery, high SKU availability, and flexible order flow. Fastenal’s supply chain is separated into several segments that include supplier relationships, hub distribution network, local infrastructure, and customer embedded assets. The supplier relationship tier includes managing over 3,000 facilities, giving the company extreme buying power due to the size of its continuous purchasing volumes. The hub distribution network is Fastenal’s core supply chain infrastructure; the company's 14 regional hubs receive the bulk of shipments from manufactures which are then shipped to branches or directly to customers. The company's 1600 branches create a local inventory presence that can be viewed as a liability rather than a competitive edge. Even though many of these branches do $6 million in annual revenue with just a few employees. The customer embedded infrastructure, which includes Fastenal's huge network of over 130k FMI devices that are installed directly into customer facilities. This creates a serious competitive advantage that is hard to replicate. The FMI device creates the ultimate supply chain efficiency with products positioned directly where they’re needed. This benefits customers and shields them from stockouts and increased carrying costs.
Fastenal’s supply chain, while advanced, is a major risk. Managing thousands of locations and over 135k FMI devices across customer sites requires flawless execution, device updates, connectivity monitoring, and integration. While the lads have yet to experience any system-wide failures, a technology failure could affect 10-20% of installed devices. Fastenal has around 21,000 employees that support its $8.2 billion revenue, which is about $380k per lad. Any technology outage could slow revenue as employees may need to revert to manual processes, which would reduce productivity. Despite having over 3,000 suppliers, cutting tools have become Fastenal’s fastest-growing and highest-margin category. There are perhaps 20 manufacturers globally who control more than 80% of the cutting tool production; if a few suppliers restrict access, favor direct sales, or consolidate through partnerships, Fastenal’s business could take a major hit.
While almost 85% of Fastenal comes from North America, some could see this as a risk; the lads at ACG do not. We believe that it is riskier for Fastenal to invest in international growth, as there are many competitors in Europe or Asia who would be able to undercut Fastenal's pricing off the bat. While the company has a fortress-strong balance sheet that would enable it to invest in these regions, it would take many years to recoup investments. This is something we see as a major risk instead of continuing to invest in the North American markets. While this would provide Fastenal with little to no hedge if reshoring went south, Fastenal operates in a basically recession-proof business. Demand may slow, but it will not disappear, shit is always being built. There is also a hint of management risk that is involved with Fastenal, as most of the leadership team has been with the company for 15+ years. Any hires that come from outside the system could be seen as risky hires for outsiders and investors.
Large manufacturers are aggressively reducing the number of supplier countries from 300 to 500 partners down to 50-100 strategic partners, which creates major opportunities for Fastenal but also risks if they are not included. If Fastenal’s win rate declines over the next few years, the company could see its growth take a major hit. Amazon Business has also reached a $40 billion GMV, primarily through office supplies and other items that require no expertise. That $40 billion, while a big number, is not a segmented number for just industrial companies; $3 of that $40 billion could include the pencil you bought on Amazon. The numbers aren’t just coming from companies in the industrial and professional space. At some point, Amazon’s Business segment could achieve technological capability and supplier relations similar to what Fastenal is currently offering.
The commoditization risk of Fastenal’s FMI device could be a risk for Fastenal with chinese manufactures producing similar devices for a fraction of the cost. If customers can implement vendor-agnostic smart inventory devices that work with any distributor, Fastenals competitive advantage could disappear. Switching costs would also take a hit as distributors would no longer have to eat the costs from removing devices and implementing new systems; they would just need to change suppliers within their current infrastructure. This sort of thing is starting to happen in other industries; restaurants have third-party management tools that can integrate with multiple food distributors. If and when an industrial supply platform emerges, it could damage Fastenal's competitive advantages within the space.
Labor shortages are another risk; current skilled labor shortages are driving demand for advanced automation and technology tools to enhance cutting tools, ergonomic equipment, and worker safety solutions. If automation technology advances faster than expected, this risk can be minimized. Immigration restrictions could also accelerate labor shortages, something Fastenal has no control over. However, if a manufacturer has a strong workforce, then they tend to care more about cost-minimizing purchase decisions over productivity tools. Immigration shenanigans could also accelerate labor shortages. Labor shortages could lead to a demand disk from manufacturing automation. Automated facilities have been known to consume fewer industrial suppliers per dollar of output versus traditional manufacturing (don’t need to buy tools, safety equipment, or toilet paper for robots).
The rise of digital marketplaces threatens the supply relationships, especially in categories where service and product knowledge is a value add that is minimal. If manufacturers begin to sell goods directly through their own platforms, distributors will get relegated to holding the bag for emergency purchases that are in their least profitable segments. Although this risk varies through product category and customer segment, simple sectors will be vulnerable, while highly specialized products will remain protected. Larger customers with sophisticated needs are more vulnerable to direct relationships as they have negotiation leverage and technical expertise that reduces distributor value. While small customers remain dependent on distributors, as they lack the resources to maintain and manage hundreds of manufacturing relationships.
The next twelve to xyz months represent major growth opportunities for Fastenal, as companies have all committed to major capex investments. Though Fastenal currently trades at a strong premium relative to its peers, this creates some funk. The company needs to deliver continued strong growth, expand margins, and increase its digital transition to further its competitive advantage. Any missteps, large or small, could have an outsized impact on the company's valuation. Management believes that the FMI install base will increase, as well as customer sites spending $50k+, and small to medium-sized accounts will snowball. Fastenal could take a major valuation hit if any of the following occurred: a major operational failure that affects thousands of customers, a large account loss, gross margin compression, or continued Amazon Business growth.
The bad boys over at Azar Capital Group are fans of Fastenal and believe they are on the up and up. The core business fundamentals are straight bussin 31% ROIC, 33% ROE, minimal leverage, and consistent execution through the good, the bad, and the ugly times. With continuous growth in embedded FMI devices, strong digital revenue growth, and increased spend by customers of all sizes, Fastenal continues to impress. Fastenal is a top-tier long-term play as they continue to deliver strong revenue growth across many industrial segments with major growth opportunities within the data center, EV infrastructure, and reshoring industries.
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Disclosure
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