Fastenal Could Be In For A Big Sell-Off

Fastenal Reports As-Expected Results 

We don't want to imply that Fastenal NASDAQ: FAST is in bad shape because it's not. The problem that we are faced with is the same one that we were faced with when the company reported Q1 results. The results are 100% as expected, revenue is supported by price increases, margins are under pressure, and the outlook for growth could be stronger. The analysts are expecting about 3% year-over-year growth this year and 8% next year which is well below the S&P 500 average. The point we're trying to make is that trading at 30 times earnings, this market has more than likely priced in this company's growth. 

No Surprises In Fastenal's Q2 Report

Fastenal results weren't bad but they did not exceed the analyst’s consensus which is a bad thing in this kind of market. And it's not like the analysts have been raising their estimates because they haven't. The company's revenue of $1.51 billion was in line with the consensus estimate and fell 0.1% from last year but that's not all. What's worse is that 80 to 110 basis points of revenue can be attributed to price increases intended to offset rising inflation, and that’s not counting the addition of 155 new OnSite locations. 

On a sequential basis, sales are up 6.3% and 10% over the last two years so the news isn't all bad. Rising demand in the manufacturing and construction segments of the business are more than offsetting weakness in COVID-related PPE spending.

Breaking the sales down, daily sales fell - 0.1% for the quarter due to weakness in a single segment. Safety Products sales fell 38.6% while Fasteners grew 28.4%, OnSite sales grew 25%, and the other category grew 12.9%. Notably, the company's Fastenal Managed Inventory program is working very well. Sales through FMI devices increase 61.4% over the last year and accounted for 31.1% of the sales.

Moving down the report, the company was able to improve margins by 200 basis points despite rising price pressures. Price increases enacted earlier in the year are offsetting higher shipping and logistics costs and the company says it is planning to continue raising prices to manage upwardly trending costs. On the bottom line, the company's GAAP EPS of  $0.42 beat the consensus by a penny but is flat from last year just like revenue. The bright spot is that earnings are up 16% over the past two years and it looks like, at least for now, the company is able to manage its margins accretively.

Fastenal Is A Fortress For Your Income Portfolio

Regardless of the price action in Fastenal, the company's balance sheet is a fortress and the dividend is very safe. The stock yields a little more than 2% with shares trading near $53 and there is also a high expectation for future dividend increases. The company has been increasing the distribution for 23 years with a 12%  CAGR and we see future increases in the double-digit range as well. The only red flag is the payout ratio which is running above 70% but that is mitigated by the fortress balance sheet, incredibly low leverage ratio, ample free cash flow, and outlook for growth in calendar 2023.

The Technical Outlook: Fastenal Hit A Peak

Price action in Fastenal is flat in early pre-market trading but it certainly looks like the stock has hit a peak. Prices popped to a new all-time high a few days before the Q2 earnings release and resistance was confirmed at that level. The daily charts suggest sideways trading is possible but the longer-term weekly and monthly charts are more bearish. The weekly chart is showing a significant divergence in the indicators from the recent high that does not inspire bullish sentiment in us. In our view, this stock is set up for a sell-off that could shave as much as 20% off the price. Our targets for strong support are near $49.50, $48, and $44.