Written by R.W. Baird analyst David J. Manthey, CFA with Quinn Fredrickson, CFA 11/6/20
The seasonally adjusted Fastener Distributor Index (FDI) for October was 56.5, improving for the second
consecutive month. Nearly all components of the FDI showed m/m improvement. Looking forward, the
Forward-Looking Indicator (FLI) also showed nice improvement, reaching the highest levels since January
2018 at 64.5. Taking the FDI and FLI together, in our view, we believe this indicates October fastener
market conditions showed m/m improvement at a greater rate than September.
About the Fastener Distributor Index (FDI). The FDI is a monthly survey of North American fastener
distributors, conducted with the FCH Sourcing Network and Baird with support from the National Fastener
Distributors Association. It offers insights into current fastener industry trends/outlooks. Similarly, the
Forward-Looking Indicator (FLI) is based on a weighted average of four forward-looking inputs from the FDI
survey. This indicator is designed to provide directional perspective on future expectations for fastener
market conditions. As diffusion indexes, values above 50.0 signal strength, while readings below 50.0 signal
weakness. Over time, results should be directly relevant to Fastenal (FAST) and broadly relevant to other
industrial distributors such as W.W. Grainger (GWW) and MSC Industrial (MSM).
October FDI shows momentum improved m/m vs. September and at a faster rate. The seasonally
adjusted October FDI (56.5) remained well into expansionary territory and improved m/m at a faster rate
than September. Nearly all FDI components saw improvement but gains were most significant across the
seasonally adjusted sales index, which came in at 65.1 vs. 60.8 last month. Pricing was mostly stable with
FLI continues recent upward march. The seasonally adjusted FLI was 64.5, improving nicely from
September’s 60.6. This was also the highest FLI reading recorded since January 2018. We view this
breakout as a positive sign going forward, as low customer inventories, coupled with a continued slightly
more optimistic tone around hiring, could bode well for near-term prospects. Net, we believe the FDI
should see expansionary readings in the near term, implying additional m/m improvement in market
conditions ahead even as trends on a y/y basis for many respondents may remain down.
Hiring sentiment continues to moderately improve. The FDI employment index registered a 58.3
reading vs. September 53.7. Looking at the broader economy, despite a continued recovery in the labor
market, the unemployment rate remains elevated (6.9% as of October). The October jobs report showed
slightly better than expected jobs added (+630,000 vs. economists’ consensus of ~600,000), but the
economy remains down about 10 million jobs from pre-pandemic levels. This was the seventh straight
month of net gains but also the fifth consecutive month of decelerating additions.
Respondent commentary mostly focused on election. The Presidential election was not surprisingly the
main area of focus for respondents this month. One respondent indicated, “The future is hinged on two
things not in anyone’s control: the general election and potential spikes in COVID globally,” while another
commented, “I have a feeling this survey would be vastly different if you held it on 11/4 versus 11/2.”
There were also comments that suggested demand continues to strengthen. Per one participant,
“Business is definitely improving and [our] expectation is to stay on a growth pattern but at a slower rate
than what some industry economic sources are saying. What happens with COVID the next few months
can be a major factor on the positive growth [we’re] experiencing currently.” Attitudes about expected
activity levels over the next six months compared to today remain more positive than negative on
balance, however, with 72% of participants expecting higher activity levels and only 6% expecting lower.
Fastenal reported 4.1% overall October daily sales growth vs. our +0.7% estimate, again boosted by
significant demand for safety/PPE (+32% y/y). Excluding safety products, underlying sales were -1.6% y/y,
showing continued sequential improvement relative to September’s -3.5% y/y. Similar to an FDI reading
that indicated improving fastener markets sequentially, FAST’s fastener sales were better m/m at -4.7%
(September -6.1%). Looking forward, November safety product sales will likely see continued elevated
demand, although we are conservatively assuming m/m moderation (our November estimate is +10%
y/y vs. October +32%). We expect underlying momentum in fastener products and other non-fastener
products to be mostly steady with October. Putting it all together, we are modeling overall daily sales –
0.2% y/y in November, which will be reported December 4.
Fastenal: Risks include economic sensitivity, pricing power, relatively high valuation, secular gross margin
pressures, success of vending and on-site initiatives, and ability to sustain historical growth.
Industrial Distribution: Risks include economic sensitivity, pricing power, online pressure/competitive
threats, global sourcing, and exposure to durable goods manufacturing.
For the full FDI report for October 2020, with graphs and disclosures, Click-here.