Fastenal (NASDAQ:FAST) Down On Tepid Earnings

COVID-19 Underpins Fastenal Results

Fastenal (NASDAQ:FAST) reported an OK quarter but not a great one and one with a puzzling surprise. While the homebuilding market seems to be ramping up sales of fastener products are lagging. The good news for Fastenal is its diversified product line which includes janitorial, sanitation, and PPE equipment that is in high demand right now. Looking forward, we can expect sales of fasteners (nails, screws, bolts, etc) to grow, and possibly at a double-digit clip the question is when. Regarding share prices, the share prices aren’t responding favorably to the Q4 news because it wasn’t anything more than the market was expecting.

Fastenal Beats On The Top And Bottom Line

Fastenal beat the consensus estimate on the top and bottom line but not by much. The average S&P 500 company beat its top and bottom-line results by solid double-digits in the 2nd and 3rd quarter of the year and that is the expectation now as well. Because the consensus for YOY revenue growth was about 5.0% the 6.2% posted isn’t much to write home about however good the news.

On a segment basis, the company’s gross daily sales increased by 6.4% with strength in safety equipment and weakness just about everywhere else. Sales of safety equipment increased by 34.6% while fasteners fell 2.3% and the Other category posted a low single-digit increase. Sales growth is also underpinned by the company’s expansion more so than organic results. Fastenal expanded its vending machine count by 3,456 or 3.75% of the base to 95,733 while also increasing store count. The company signed 223 new Onsite locations bringing that total up to 1265.

Moving down the report, the company’s margins shrank on a YOY basis as expected by not as much as forecast. The gross margin came in at 45.6% versus the 45.2% expected and is also up on a sequential basis. As for earnings, the Q4 GAAP earnings of $0.34 are up 9.6% from last year and a mere penny ahead of the consensus.

Fastenal Generates Cash, Gives It To Shareholders

Fastenal is in business to return capital to shareholders and it did that in the 4th quarter. The company opted not to repurchase shares in the Q4 period but it did pay the dividend, approve a special dividend, and has now increased the payout for the 22nd year. With this latest increase, the stock is yielding just over 2.2% with a positive outlook for future increases. The company is paying out about 75% of its earnings which might be a concern if not for the balance sheet. The balance sheet is a fortress with low levels of relative debt, $330 million in cash and securities, extremely high debt coverage, a low 0.5X leverage ratio, and ample FCF.

The stock might be considered overvalued at 32X its forward earnings estimate but don’t forget, you get what you pay for. What you get with this stock is a solid track record of growth, a positive outlook for growth, a fortress balance sheet, and a very safe dividend.

The Technical Outlook: Fastenal May Be In Correction

Shares of Fastenal have had a stellar rebound from the 2020 lows but that run may be over. Price action is down more than 3.5% in the wake of the Q4 report and indicated lower by both MACD and stochastic. The next target for support is near the $47.50 level and even it may not hold up prices. A move below $47.50 would be bearish for the next quarter or more and likely take price action down to the $45.00 and $42.50 levels. If, however, support is able to hold up prices at the $47.50 level the stock may enter a new trading range until there is some clarity on the fastener situation.