Fastenal: Nuts and Bolts of a Solid Investment.

Fastenal is a leading industrial distributor focused on fasteners, safety supplies, tools, and maintenance products, with a business model built around local service, supply chain integration, and operational efficiency. Through its Onsite locations, vending machines, and expanding digital tools, Fastenal supports manufacturers and builders with reliable, tailored solutions. With continued investment in e-commerce and logistics, the company is positioning itself for long-term growth. The question is whether Fastenal presents a compelling opportunity for long-term investors.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Fastenal. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Fastenal's direct competitors either. Thus, I have no personal stake in Fastenal. If you want to purchase shares or fractional shares of Fastenal, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Fastenal is a leading industrial distributor founded in 1967 and headquartered in Minnesota. The company specializes in the wholesale distribution of fasteners and a broad range of industrial and construction supplies. Its core offering includes threaded fasteners, bolts, nuts, screws, studs, and washers, which are used in manufactured goods, construction projects, and maintenance and repair operations. Over time, Fastenal has diversified its product lines to include safety supplies, tools, and other consumables. Most of its sales are business-to-business and focused on manufacturing and non-residential construction customers. Fastenal operates through a dense network of branch locations and Onsite installations that place inventory and service personnel in close physical proximity to customers. Branches serve a wide range of customers and are typically located within a few miles of client operations, while Onsite locations are embedded within or near customer facilities and are tailored to individual client needs. This local model allows Fastenal to offer rapid service, same-day inventory availability, and direct support, which has proven highly effective in retaining and expanding customer relationships. In recent years, the company has invested significantly in technology-enabled supply chain services. Its Fastenal Managed Inventory (FMI) suite includes industrial vending machines, bin stock systems, and automated inventory replenishment solutions. These tools increase visibility, reduce stock-outs, and embed Fastenal into customers’ day-to-day operations. Many of these systems are tied to long-term service agreements, resulting in recurring revenue and high switching costs for customers. Fastenal’s competitive moat is rooted in its expansive in-market footprint, deep customer integration, and operational scale. Its distribution network includes 15 regional hubs and a proprietary transportation fleet that allows frequent replenishment and efficient inventory management. With over $7,5 billion in annual revenue, the company can negotiate favorable terms with suppliers and maintain a broad SKU assortment. This scale, combined with automation in its distribution centers, supports industry-leading margins and high service reliability.

Management

Daniel Florness serves as the CEO of Fastenal, a position he has held since 2015 after nearly two decades with the company. He first joined Fastenal in 1996 and held a number of leadership roles, including Chief Financial Officer, before being named CEO. Prior to joining Fastenal, Daniel Florness worked as a Senior Manager at KPMG LLP. He holds an undergraduate degree in accounting from the University of Wisconsin. Under his leadership, Fastenal has doubled its sales and significantly expanded its international footprint, all while maintaining the company’s disciplined, customer-focused approach. Daniel Florness is widely recognized for his emphasis on frugality and efficiency—principles that echo the values of Fastenal’s founder. He has described his role as CEO as one focused on long-term positioning and people development, stating, “I think of the CEO side of the business as you're focused on the strategy where you're going and you're focused very keenly on what that means for people development and how the organization should position itself for what it's going to become.” This mindset has shaped Fastenal’s evolution over the past decade, most notably its strategic pivot from traditional branches to Onsite locations embedded within or near customer facilities. That shift has made the company leaner, more integrated, and more profitable. In addition to realigning the physical network, Daniel Florness has led Fastenal through a digital transformation. Roughly 50% of the company’s sales are now digital, a share he expects will continue to rise meaningfully in the coming years. Fastenal’s digital infrastructure—vending machines, automated bin systems, and e-procurement tools—now plays a central role in its customer relationships and revenue model. I believe Daniel Florness is the right person to lead Fastenal forward. His deep experience in the company, his focus on digitalization, and his strategic mindset have positioned Fastenal to thrive in an evolving industrial landscape while staying true to its core values.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Fastenal has consistently delivered a high ROIC above 20% every year for the past decade, which is a strong sign of a high-quality, long-term compounder. What I also like is that management actually pays attention to ROIC. They often talk about it as one of the most important numbers they track. In practice, that means they are focused on making the most out of every dollar they invest - spending wisely, running the business efficiently, and avoiding waste. It’s a sign that they understand what really drives long-term success. ROIC dipped slightly in 2024, but that’s not a concern for me. Minor year-to-year fluctuations are normal, and the figure remains well within the upper range of the company’s 10-year average.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Fastenal is almost a textbook example of how you would want equity to develop over time. The company has grown its equity in every year over the past decade except for one - back in 2015. Since then, equity has increased year after year, which reflects the strength of Fastenal’s business model. This consistent growth is the result of several key factors: a focus on growing revenue, disciplined capital management, strong and steady cash flows, and ongoing investments in the business. Fastenal also benefits from organizational resilience, allowing it to stay on course even when facing market challenges. Based on this foundation, I expect equity to continue rising in the years ahead.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It’s not surprising that Fastenal has delivered positive free cash flow every year for the past decade. In 2024, both free cash flow and the levered free cash flow margin declined, primarily due to inventory buildup and higher capital expenditures. That said, I’m not concerned. Free cash flow in 2024 still reached its second-highest level ever, and the levered margin was the third-highest on record. Management has indicated that capital expenditures will remain elevated over the next few years, largely due to investments in expanding capacity across Fastenal’s distribution center network. However, they have also expressed strong confidence in the company’s ability to continue generating robust cash flows - something that reflects the underlying strength and consistency of its business model. As free cash flow grows, investors can reasonably expect continued dividend growth. Fastenal has historically increased its dividend at an annual rate of around 10%, supported by its strong cash generation. Meanwhile, the current free cash flow yield is the second-lowest it has been in the past decade, which suggests that shares are trading at a premium valuation. However, we’ll revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business carries a manageable amount of debt - ideally, one that could be repaid within a three-year period. To assess this, I divide total long-term debt by earnings. After analyzing Fastenal’s financials, I found that the company currently carries no debt. Therefore, debt is not a concern when considering an investment in Fastenal. It’s also worth noting that over the past 10 years, Fastenal has never exceeded 0,22 years' worth of earnings in debt. This long track record of maintaining minimal debt suggests that debt is unlikely to become a significant concern going forward.

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Risks

Competition is a risk for Fastenal. Although the industrial supply industry is slowly consolidating, it remains large, fragmented, and highly competitive. Fastenal faces a wide range of rivals - from large national distributors like Grainger and MSC Industrial to smaller regional and local players. These competitors differ not only in size, but also in how they serve customers: some operate traditional brick-and-mortar stores, others rely on catalogs or mobile sales teams, and many now offer digital or e-commerce platforms. Fastenal’s strong margins and market position make it an appealing target for competitors seeking to capture market share, particularly in commoditized categories like fasteners. This can lead to pricing pressure, especially if competitors adopt aggressive strategies or undercut prices to win large contracts. While Fastenal has historically succeeded by offering reliable service, inventory management, and local presence, it must continue to prove its value in order to justify its pricing. There’s also the risk of disintermediation - where customers bypass traditional distributors entirely. Platforms like Amazon Business make it easier for customers to compare prices and order directly online. This trend could especially affect smaller accounts that don’t depend on Fastenal’s more integrated solutions. If MRO products are increasingly viewed as interchangeable commodities, Fastenal may be forced to cut prices or invest more heavily in marketing and support to retain customers. Increased competition - whether from well-funded national players, agile local distributors, or digital-first entrants - could erode Fastenal’s market share or compress its profit margins over time. The company operates in a space where convenience, pricing, availability, and service all play a critical role - and none of those advantages are permanently guaranteed.

Macroeconomics is an important risk to consider when evaluating Fastenal. As a supplier to manufacturers, contractors, and facility managers, Fastenal’s performance is closely tied to overall economic activity - especially trends in industrial production, construction, and capital spending. When these sectors grow, demand for Fastenal’s products tends to rise. But when the economy weakens, customers often reduce or delay spending, which can put pressure on Fastenal’s sales volumes and profitability. Fastenal’s products are used in both planned spending (such as infrastructure or equipment upgrades) and unplanned maintenance. Both of these categories can be sensitive to broader economic conditions. If manufacturers cut back on production, or if construction activity slows due to rising interest rates or tighter credit conditions, customers may scale back orders - even for essential supplies. A prolonged industrial slowdown or recession poses a meaningful risk. Manufacturing PMI (a widely watched measure of manufacturing health) was in contraction territory for nearly two years between late 2022 and 2024 - the longest streak since the 1970s. Although Fastenal avoided outright sales declines during that time, a deeper or more prolonged downturn could affect both volumes and pricing, especially if customers become more price-sensitive or reduce inventory levels. There are also broader macroeconomic factors that can influence Fastenal’s performance: currency fluctuations, inflation, labor shortages, interest rates, and even extreme weather events. Each of these can impact costs, customer demand, or the efficiency of Fastenal’s supply chain. For example, higher fuel and freight costs can squeeze margins, while rising interest rates can slow construction activity—both of which have downstream effects on Fastenal’s business.

Customer concentration is another important risk to consider when evaluating Fastenal. While the company serves a large and diverse customer base - approximately 270,000 locations in 2024 - a significant share of its revenue is tied to large national accounts. In fact, these big customers made up 62% of total sales in 2024. This level of concentration introduces a few key risks. First, large customers tend to have more bargaining power. Because they buy in high volumes, they can negotiate for lower prices or volume-based discounts, which can put pressure on Fastenal’s profit margins. The company must strike a balance between retaining these high-value relationships and protecting its pricing structure. If competition intensifies or these customers seek to consolidate suppliers, Fastenal may be forced to accept tighter margins in order to hold onto the business. Second, these accounts are often tied to cyclical industries such as heavy machinery, energy, and automotive manufacturing. When these sectors face downturns, large customers can abruptly scale back their orders. This was evident in December 2024, when some of Fastenal’s top clients implemented “unusually sharp production cuts,” directly impacting sales. Because these customers represent such a large share of revenue, even a modest pullback can have a noticeable effect on Fastenal’s financial performance. There is also a growing divergence between large and small customer trends. While Fastenal has continued to grow its business with major accounts, smaller customers have been shrinking as a share of total sales. This suggests a growing dependence on large clients and adds to the concentration risk over time. If a few of these major accounts were to reduce spending, switch to a competitor, or renegotiate contracts on less favorable terms, it could meaningfully affect Fastenal’s revenue and earnings.

Reasons to invest

Fastenal’s Onsite program is one of the company’s most powerful growth drivers and a key reason to consider it as a long-term investment. Onsite locations are essentially dedicated Fastenal stores embedded within or near large customer facilities. These setups allow Fastenal to deliver high-touch, day-to-day service while integrating deeply into the customer’s operations. The result is greater efficiency, better inventory management, and stronger customer retention - benefiting both Fastenal and its clients. In recent years, Fastenal has shifted its focus from opening traditional branches to expanding its Onsite footprint. This change not only reduces the company’s overall cost structure, as CEO Daniel Florness has emphasized, but also enables greater engagement with customers. In 2024, Fastenal signed 358 new Onsite agreements and ended the year with 2.031 active sites, marking a 12% year-over-year increase. While the figure came in slightly below the stated goal of 375–400 signings, it still represented one of the strongest years on record for Onsite expansion. Today, Onsite locations account for nearly 45% of Fastenal’s total sales, highlighting how central the program has become to its business model. These sites tend to attract Fastenal’s highest-value customers. The average Onsite customer site spends around $38.000 per month, and the number of customers spending more than $10.000 per month has grown at a 9% annual rate since 2017. Even more impressive, customers spending over $50.000 per month have grown at a compound annual rate of 18%. This underscores the program’s ability to deepen relationships and capture a larger share of customer spending. Beyond driving sales, the Onsite model also helps Fastenal operate more efficiently. With more volume concentrated at individual customer sites, logistics can be streamlined, resources allocated more effectively, and service levels enhanced. This not only boosts profitability but also strengthens customer loyalty. Looking ahead, the Onsite program positions Fastenal well for continued growth. It fosters long-term relationships that are difficult for competitors to disrupt and creates a service model that goes beyond simply delivering products. As more customers adopt this integrated approach, the Onsite network is likely to remain a cornerstone of Fastenal’s strategy - and a durable competitive advantage for years to come.

Fastenal’s strategic investment in its supply chain is a major reason to consider the company as a long-term investment. While many view Fastenal primarily as a distributor of fasteners and industrial supplies, management has repeatedly emphasized that Fastenal is, at its core, a supply chain company. Its ability to reliably deliver products - even when others cannot - is a key differentiator that drives customer loyalty and long-term growth. This capability was particularly evident in recent years, as global supply chains faced widespread disruption. While many competitors struggled with stockouts and delayed shipments, Fastenal leaned into the challenge. Management made deliberate decisions to hold more inventory and extend lead times, stating, “If we feel that it's going to take an extra 40 or 45 days to get a container, we'll add 50 days of inventory.” These actions required significant capital, but they ensured that Fastenal could continue serving customers without interruption. In many cases, when other suppliers fell short, Fastenal stepped in and strengthened its relationship with the customer - earning market share in the process. That customer loyalty is built not just on product availability but also on the depth of Fastenal’s supply chain services. With its nationwide distribution network, robust logistics operations, and inventory management tools like vending and bin stock systems, Fastenal moves product closer to the point of use, increasing customer efficiency. This has become especially valuable in a tight labor market. Many businesses are facing workforce shortages and struggling to manage their supply chains efficiently. As management described it, a company might need 10 of its own employees to handle inventory in an inefficient way - whereas Fastenal can step in with just three or four people, streamline the process, and actually improve the level of service. In this way, Fastenal becomes more than a supplier - it becomes a productivity partner, helping customers operate more effectively with fewer resources. Fastenal’s investments in its supply chain aren’t just about navigating short-term disruptions - they’re about creating long-term strategic value. As customers seek to operate more efficiently and manage increasingly complex supply chains, Fastenal is well-positioned to step in as a trusted partner. Whether through Onsite programs, vending technology, or integrated digital tools, Fastenal’s capabilities help customers lower costs, reduce waste, and ensure continuity - especially in industries where downtime is expensive and reliability is non-negotiable.

Fastenal has been steadily investing in its e-commerce and digital capabilities, and this has become an increasingly important part of why the company is worth considering as a long-term investment. While Fastenal is best known for its local branches and in-person service, it has also been evolving into a much more digitally enabled business. Today, a large portion of its sales comes from online and electronic ordering systems. This includes tools that let customers place orders directly through Fastenal’s website or connect its inventory with their internal purchasing platforms. These digital solutions make the buying process faster, more convenient, and more efficient - helping Fastenal better serve its customers and adapt to changing buying habits. A key driver of this shift is eProcurement, where Fastenal integrates directly into the purchasing systems of large customers. These relationships are efficient and long-lasting. Management is also working to improve the online experience for smaller customers and the maintenance teams within larger organizations. Fastenal has recognized that smaller customers - especially those spending under $5.000 per month - are increasingly shopping online. However, some of this business has been lost in recent years due to branch closures and a less competitive web experience. In 2024, Fastenal took steps to address this by restocking a wider range of SKUs at its distribution centers to better support online availability. The aim is that when a customer visits the Fastenal website, they see what’s in stock and when it can be delivered - instead of being told to call a local branch. While e-commerce at Fastenal is still developing, it’s improving quickly and rests on a solid foundation. Management has reorganized teams to strengthen the web channel and is focused on expanding product availability, improving delivery tracking, and making the entire customer experience more seamless. As these improvements roll out, Fastenal is likely to see increased digital adoption from both small and large customers - supporting future growth, scalability, and profitability.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,00, which is from the year 2023. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 10,3% in the next five years. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Fastenal's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $25,65. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Fastenal at a price of $12,82 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.173, and capital expenditures were 227. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 159 in our calculations. The tax provision was 358. We have 572,9 outstanding shares. Hence, the calculation will be as follows: (1.173– 159 + 358) / 572,9 x 10 = $23,95 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Fastenal's free cash flow per share at $1,65 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $20,76.

Conclusion

I believe Fastenal is an intriguing company with strong management. It has a moat built on its expansive in-market footprint, deep customer integration, and operational scale. The company has consistently delivered a high ROIC above 20% over the past decade, which signals it is a quality compounder. Free cash flow decreased slightly in 2024 but still reached its second-highest level ever, and management remains confident in the company’s ability to continue generating strong cash flow. Competition is a risk because Fastenal operates in a fragmented and highly competitive industry, where traditional distributors and digital platforms compete aggressively on price and convenience. Macroeconomics is also a risk, as Fastenal’s performance is closely tied to industrial activity, construction, and capital spending - all of which can decline during economic slowdowns. A prolonged downturn or tighter financial conditions could reduce customer demand, pressure pricing, and hurt profitability. Customer concentration presents another risk. A significant portion of Fastenal’s revenue comes from a small group of large clients, giving them pricing power and increasing vulnerability to sudden spending cuts. If even a few major customers scale back or negotiate lower prices, it could meaningfully impact the company’s financial results. On the positive side, Fastenal’s Onsite program is a key reason to invest. It places Fastenal directly inside customer facilities, deepening relationships, increasing customer retention, and driving high-value recurring sales. Its continued investment in supply chain infrastructure has also been a major strength, allowing the company to deliver reliably - even during disruptions - and win customer trust and market share. In addition, Fastenal’s growing e-commerce and digital tools strengthen customer relationships, improve efficiency, and help the company adapt as more purchases shift online. Overall, I believe Fastenal is a great company. Buying shares at the intrinsic value of the Payback Time price of $40 would, in my view, represent a solid long-term investment.

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