Fastenal Is Why You Should Be Worried About The Broad Market

Good News Not Good Enough For Fastenal

Fastenal (NASDAQ: FAST) reported a decent FQ1 but the report is a great example of what we have begun to fear in the market. The results were completely as expected,  margins are under pressure, and costs are rising throughout the supply chain. Granted, this is all the result of a rapidly reopening economy and evidence of underlying economic strength so we are not expecting a major bear market to form. The point we're trying to make is that these kinds of results aren't the kind to inspire a market to rally. The more likely scenario for Fastenal and the broader market is that sentiment will be reset, prices will correct, and then the rally will continue. Looking at the charts of Fastenal, that correction may have already started. 

Fastenal Meets Expectations Versus An Easy Comp

Fastenal's Q1 wasn't horrible given the state of the global economy but the 3.6% growth was completely as expected and versus a very easy comp. The  $1.42 billion is up sequentially but only flat for the past few quarters where other businesses have seen theirs accelerate. Digging into the data the details get a little better in terms of revenue but that really is the only news we can classify as good. There was one less day in the 2021 period and when adjusted to that sales are up 5.3%. Revenue gains were made in all three operating segments with Safety Products leading at 14%, Fasteners in second with 4% growth, and other growing low single-digits. All three segments were underpinned by higher realized prices but those gains did not transfer to the bottom line. 
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The company's operating margins came under pressure due to rising costs. The company says it will be raising prices to mitigate those effects moving forward but that impact is yet to be seen. The gross margin came in at 45.4% versus the expected 45.9% and operating margins shrinking by a tenth. The silver lining is that despite mounting headwinds, operating cash flows increased by 14% on a net YOY increase in margins and revenue. On the bottom line, the $0.37 in GAAP EPS is also exactly what the market was looking for. 

Execs did not give any kind of guidance but did indicate the company's footprint was growing. Assuming the reopening continues to gain momentum revenue and earnings should continue to grow sequentially. The comps are a different story. The comps for the next quarter are much tougher and may result in negative YOY revenue growth even with a robust price increase. 

"The overall impact of product pricing on net sales in the first quarter of 2021 was 60 to 90 basis points. Pressures related to product cost inflation are rising, however, and we anticipate taking pricing actions in the second quarter of 2021 to mitigate these effects."

Fastenal Is A High-Quality Dividend Payer 

Fastenal is a high-quality dividend payer that just declared its Q1 distribution. The payment is in line with the previous and worth about 2.2% when annualized. Based on the revenue, earnings, cash flow, and balance sheet we expect to see the dividend increased early next year for the 24th consecutive time. Based on those same metrics, we expect the increase could be worth 10% to 15% of the current payment or another .3% of yield with shares trading near $50.75. Something else to consider is the possibility of special dividends. Fastenal has paid several noteworthy special dividends over the years and could easily do so again. The last was in the 4th quarter of 2020 and worth 0.78% in yield. 

The Technical Outlook: Fastenal Is Range-Bound And Under Pressure 

Shares of Fastenal are down more than 2.5% in premarket trading and might be heading lower. The premarket action is above a key support line so there is hope for the bulls but we don't think it worth the risk, at least not right now. A move below the short-term EMA at $49.00 would be bearish and could lead this stock much lower. The bottom of the current range is near 444 or about 10% below today's premarket action. If this trend continues for the Q1 season we could see the S&P 500 correct 10% or more. In either case, we'd be buyers.