Data Centers, Aerospace, and Machined Parts: This Company's Earnings Just Made the Bull Case for U.S. Industrials

It's always fascinating to hear what industrial supply companies like Fastenal (NASDAQ: FAST) say about the economy and trends in their end markets.

Their sales are relatively short-cycle, meaning there's a very short period between when a customer sees an increase in demand and when they use or order Fastenal's industrial fasteners, safety products, and a wide range of industrial products. That makes them ideal barometers of current market conditions and gives investors a great early read on earnings season.

Fastenal and manufacturing's end-market growth

This continues to be a year of recovery for the U.S. manufacturing sector, with the Institute for Supply Management's Purchasing Managers' Index (PMI) indicating solid expansion every month this year, having spent the 2023 to 2025 period almost entirely in contraction in the U.S.

That recovery was further confirmed in Fastenal's results:

• Daily sales growth in heavy manufacturing (Fastenal's core end market) grew 20.2% year over year.
• Daily sales growth in all other manufacturing grew by 13.2%.
• Daily sales growth in all other end markets grew by 12.3 %.

However, it's important to dig deeper into the source of the strength, and there's some critical information here for the upcoming earnings season.

Which sectors are looking strong in the current earnings season?

Based on what Fastenal's management said on its third-quarter earnings call, you can generally put these sectors into three buckets.

In the first bucket, strong end markets include machined products, aerospace, and industrial equipment, according to CFO Max Tunnicliffll. He also noted, "Growth opportunities were strongest in data centers."

Image source: Getty Images.

The second bucket contains end markets with more balanced conditions. Nonresidential construction continued to grow, and construction growth overall "remains healthy," according to CEO Jeffery Watts. Still, growth did slow down from an unusually strong second quarter -- something to look out for when construction-related stocks report. In addition, traditional manufacturing and automotive are relatively weaker than the heavy manufacturing groups in the first bucket.

Finally, the third bucket contains some relatively weak areas, such as agriculture and food.

What it means to investors

Overall, this is a bullish report from Fastenal, indicating broad-based strength in the industrial sector heading into the end of the year. If aerospace, data center construction, machine parts, and industrial equipment customers are ramping orders from Fastenal, it's because they continue to strengthen in end demand, and that indicates that companies like GE Aerospace and RTX in aerospace, Illinois Tool Works and Rockwell Automation in industrial equipment, and Comfort Systems USA in data center mechanical and electrical contracting will report good quarters.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Comfort Systems USA, Fastenal, GE Aerospace, and RTX. The Motley Fool recommends Illinois Tool Works and Rockwell Automation. The Motley Fool has a disclosure policy.