Don’t Underestimate This Market
Shares of Fastenal (NASDAQ: FAST) have staged a stunning and largely underreported rebound since hitting their post-pandemic bottom. Supported by an equally stunning rebound in the housing data, Fastenal has seen its share prices advance 57% to exceed the pre-pandemic highs and set a new all-time high.
With the stock trading about 30X its forward earnings it looks like it could be a bit overvalue but let me warn you. Don’t underestimate this market, the housing rebound is strong and has legs and that spells future demand for nails, screws, liquid fasteners, and everything else under the Fastenal brand.
Coincidentally, Fastenal is seeing a post-pandemic boost related to COVID-19 that has nothing to do with fasteners. The company’s Safety Products segment saw a substantial increase in sales that offset weakness in the fasteners segment. Demand for fasteners fell -16% in the Q2 period (peak of the shut down) while that for safety equipment rose 116%. Looking forward it is safe to anticipate stickiness in demand for safety along with a rise in demand for faster products.
“our traditional sales were down throughout the second quarter of 2020. Looking at trends within the second quarter of 2020, however, business activity appears to have bottomed in April before improving in May and again in June. This is best illustrated by our daily sales rate trend for fasteners, which is our most cyclical product category and which was unaffected by surge activity.”
The Results Are In
Fastenal beat consensus estimates soundly and I am not surprised. The trend I am noticing this earnings cycle is that the analyst’s estimates are far too low for the quarter and that means two things. One is that companies like Fastenal will beat their consensus, the other is that forward outlook will have to be rethought. In the case of Fastenal, Q2 revenue came in at just over $1.51 billion or up 10.34% from the previous year. The results beat consensus by 20 basis points and carried through to the bottom line.
Earnings were impacted by product mix. The increase in safety/decrease in fasteners results in an unfavorable mix and a 1.5% reduction in gross profit margins. That said, EPS came in at $0.42 and beat consensus by $0.06. More importantly, the EPS put the company on track to exceed the full-year consensus by high-single/low-double-digits providing fuel for analysts upgrades.
A Fortress Balance Sheet For This Dividend Aristocrat
Fastenal doesn’t quite make the cut as a Dividend Aristocrat with only 23 years of consecutive increases but I’ll let it slide. The company has proven to be a consistent dividend payer and distribution increaser which is what I like to see. The stock is paying over 2.25% and a very safe 2.25% at that. Regarding the increase-history, the 5-year CAGR is running near 12% and the payout ratio is near $72%.
The CAGR is good, not the best I’ve seen but enough to make me believe future increases will be meaningful. The payout ratio appears high at first glance but there are mitigating factors. The first is that the analyst’s estimates are too low so this year’s forward-looking payout ratio is too high. The second is the company has the best-looking balance sheet I think I’ve ever seen, with a coverage ratio in the 80% range and nearly no debt, so I have no fear of dividend suspensions or reductions and every expectation of future increases. The next increase is expected during the Q4 reporting cycle.
The Technical Outlook: Another Buy Signal In The Making
The chart of Fastenal shows a stock in a clear uptrend. With no indications of topping present, the earnings beat, the dividend, and the outlook it looks like the uptrend will continue. Assuming that is the case, the stock is setting up another buy signal and it could be a strong one. The stochastic is already showing a weak bullish crossover and MACD is right behind. Today’s pop at the open may be enough to do it but there is a caveat. Pre-market action is still below resistance at the recent high, a break above that level is needed before getting really bullish on this stock.
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