More Than One Reason To Buy Fastenal, Quickly

Key Points

• Fastenal reported Q4 results beating on the top and bottom lines. 
• The company also announced its 25th dividend increase earning it Dividend Aristocrat status. 
• Near-term price action is downward, but the bottom should be hit very soon. 

Fastenal NASDAQ: FAST just reported its Q4 earnings and has given the market more than 1 reason to become a buyer of this stock. Not only did the results outperform the market’s expectations, but it announced another dividend increase. A dividend increase on its own is good, but this one looks a lot better when you consider the number of annual increases that came before it, which were 24. 

This means the latest increase, the 25th consecutive annual increase, qualifies the stock as a Dividend Aristocrat. Again, not so much of a catalyst until you think of all the indices and ETFs pegged to the Dividend Aristocrat Index. There are dozens of Dividend Aristocrat ETFs, the top two are worth more than $90 billion in market cap, which makes for a powerful tailwind for this stock because all those ETFs will need to buy some of Fastenal to maintain their allocation. 

The insiders and institutions have been buying this stock over the last year in preparation for this day. The insiders, except for 1 sale by an EVP, have only bought this stock for the last 5 quarters, and the institutional activity is the same.

The institutions were barely net-sellers for a single quarter in 2022 but netted shares for 10 of the 11 quarters leading up to the present and including Q1 of 2023. This has the total institutional ownership up to 77% and growing if the Q4 results have anything to do with it. 

Fastenal Beats On The Top And Bottom Lines 

Fastenal had a mixed quarter on a segment basis, but 2 things stand out. The company produced market-beating revenue and earnings despite weakness in 2 of the 4 core segments. At the same time, portfolio diversification, specifically the expansion into international markets, helped to offset the aforementioned weakness.

The revenue of $1.69 billion is not only up 10.5%, but it beat the consensus by 120 basis points, and the strength carried through to the bottom line. On a segment basis, the Capital Equipment and Commercial segments both produced growth while the  Consumer and Construction segments both contracted; no surprise. 

Moving down to the earnings, there was some margin pressure, but the contraction was in-line with expectations. The company says mix, FX headwinds and the combination of input prices and pricing actions are to blame.

The company eased off on pricing actions in the quarter due to a moderation in inflation that may lead to higher margins in 2023, assuming inflationary pressures continue to decline.

Regarding the margin, the gross margin was contracted by 70 basis points but was offset by an improvement in SG&A that left the operating margin flat on a YOY basis. This left GAAP earnings at $0.43 or up $0.03 from last year, a penny ahead of consensus, and in a good position to maintain dividend health and continue repurchases. 

Fastenal On Tack For Capital Returns In 2023 

Fastenal increased its quarterly dividend payment by nearly 12% when it released the Q4 results. This is a slowdown from the 14% CAGR the company has been running but still a healthy increase and one that is more sustainable.

Currently, the stock is yielding more than 2.6%, which is a full 125 basis points above the broad market and here are share repurchases to consider as well. The company has up to 6.2 million shares left under its current authorization, which amounts to about 1% of the outstanding shares. 

The Technical Outlook: Fastenal Is Bottoming

Shares of Fastenal hit bottom in early October 2022 and appear to be returning to retest support now. The post-release action has the stock down about 0.6% in premarket trading and above key support at the $45 level. There is a chance for support to kick in at the higher $47 level, but that needs to be confirmed by the market.

A fall below $47 is not necessarily bearish, but a move below $45 might be. Longer term, this stock should find a firm bottom soon and begin moving sideways in preparation for the next economic expansion if it doesn’t do so today.