Al Root

Manufacturing earnings kick off with industrial distributor Fastenal on Friday. Things have been tough for a while in this sector, but there is reason for optimism.

Fastenal results are always a useful read on the manufacturing economy. The company distributes tens of thousands of products to thousands of customers in dozens of industries across the country.

Things haven't been great. The manufacturing economy has been mired in a long slump. The Institute for Supply Management's Purchasing Managers' Index, or PMI, a key gauge of manufacturing activity, has been below 50, the level that indicates growth, for 25 of the past 26 months. It is one of the weakest stretches on record. The PMI declined for 16 out of 18 months in 2008, during the Financial Crisis.

It has been a painful period characterized by customers working off inventories, falling prices, and lower employment. There is new reason for hope though. The index of new orders -- a predictor of future growth -- has been above 50 for the past two months.

As for Fastenal, Wall Street is looking for earnings per share of 48 cents from sales of $1.8 billion. The company reported EPS of 52 cents a share in the third quarter of 2024 and 46 cents in the fourth quarter of 2023.

Along with earnings, management should provide some insights on the manufacturing economy on the company's earnings conference call starting at 10 a.m. Eastern time.

Coming into Friday trading, Fastenal shares have gained about 17% over the past 12 months, trailing the S&P 500 by about seven percentage points.

Fastenal stock trades for about 34 times estimated 2025 earnings, according to FactSet. A year ago the stock traded for about 30 times. The S&P 500 trades for about 22 times estimated 2025 earnings.

Fastenal typically trades at an above-market multiple because it grows faster than the average company by taking shares from smaller distributors. EPS grew roughly 10% annually between 2013 and 2023. Earnings growth for the S&P 500 was closer to 8% annually over that span.

"Fastenal is among the highest quality companies we cover," wrote Baird analyst Dave Manthey in a recent report. That's another reason for an above-average multiple. "Still, with the potential for valuation retrenching as growth accelerates (the historical pattern for Fastenal), we prefer a slightly wider margin of safety."

Fastenal's price/earnings ratio tends to contract when growth accelerates. That isn't unusual for companies in cyclical industries. PE ratios are high when earnings are depressed and low when business is humming. Valuation multiple contraction is something for investors to watch for -- and it would be a sign that the industrial economy is accelerating. That would be good news for everyone.

Write to Al Root at allen.root@dowjones.com

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January 16, 2025 16:51 ET (21:51 GMT)

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