Fastenal Outruns Inflation, Shares Pop

Fastenal Has Pricing Power You Want To Own

Fastenal’s NASDAQ: FAST Q3 earnings were a bit of a mixed bag but reveal something the market desperately needs to see this earnings cycle and that is pricing power. While the company reported the negative impacts of systemic headwinds including rising input costs, labor, and freight, demand in all three of its operating segments remained strong and pricing actions helped drive the results. What this means to us is that, while other companies, will be struggling to make up lost ground in the coming quarters, Fastenal should be able to build on this quarter’s success and drive additional games next quarter and next fiscal year.

Fastenal Margins come Under Pressure

Fastenal had a great physical third quarter but there is some bad news. The company's $1.55 in consolidated revenue is up 9.9% over last year but it missed the Marketbeat.com consensus by 64 basis points. 64 basis points is a slim margin but any miss is bad news in a market expecting outperformance. 

Regardless, the revenue was up more than 12% versus 2019 and should continue to grow on a year-over-year basis if not sequentially. On a segment basis, the Fasteners segment lead with growth of 20.2% and was followed by a 9% gain in the other category. The safety category contracted by 2.9% but this is versus last year's robust gains so should be taken with a grain of salt. As for pricing, pricing added 230 to 260 basis points to the company's revenue growth, and further pricing actions are expected.

Moving down the report, the company experienced rising cost pressures but they have so far been mitigated by internal efforts to control costs, revenue leverage, and pricing actions. At the gross level margins improved by 100 basis points to hit 46.3% and topped the consensus estimate by 20 basis points. At the operating level, margins remained flat at 20.5% to drive GAAP earnings of $0.42. The GAAP earnings are up 10.5% over last year to outpace revenue growth and come in as expected despite the small shortfall in revenue.

The company did not give any formal guidance for revenue or earnings expectations but did lower its guidance for new signings for its vendable products. The company is now expecting new signings to run in the range of 20,500 to 22,000 versus the previous low end of 23000 or down 12% at the high end of the range. 

Fastenal Has A Safely Growing Dividend

Fastenal is one of the safer dividend-payers on Wall Street and comes with a 2.15% yield. The company's payout ratio is a bit on the high side at 72% but the balance sheet is a fortress. The company's debt and leverage are very low with leverage running below 0.5 x earnings and coverage astronomically high. Free cash flow may get tighter over the next year as inflation rises but so far it appears the company is mitigating that pressure. Fastenal has been increasing the dividend for nine years at a 13% CAGR so we do expect the tenth increase later this year. We do not, however, expect the next increase to be in the double digits this time around. 

The Technical Outlook: Fastenal Is Preparing To Reach A New All-Time High

Shares of Fastenal advanced more than 2% in the wake of the Q3 earnings report and are now trading above the short-term moving average. This move confirms a bottom and reversal in the wake of a recent correction and has the stock ready to move up and retest the all-time high. A move up to the all-time high will be worth about 5.25% to investors and could be the beginning of a larger movement. If shares are able to break to a new all-time high and maintain those levels we see this stock moving up to the $61 level in the near term and then up towards the $70 range in the mid to long-term.