Key points
- Fastenal had a tough quarter, but its diversified model delivered growth and solid cash flow.
- Dividends are safe and growing, a special dividend is possible and analysts support the market.
- The stock price may fall more now, but the bottom will soon be reached and long-term gains will come.
- 5 titles we like most about Fastenal
Dividend aristocrat Closure NASDAQ: FAST it fell about 5% after release in the first quarter and could fall further. Not because the business is declining, but because the valuation has reached unsustainable levels. This stock is up nearly 100% over the last two years, recently hitting an all-time high, and a correction is due. Most of the gains for this housing stock have been made this year, about 3,600 basis points, since January, when the stock was included in the Dividend Aristocrats Index, another factor in today’s decline.
Due to indexation, inclusion in the Dividend Aristocrat index is responsible for this year’s price increase. Dividend Artistocrates are desirable stocks for most market participants and a highly invested market segment. Its inclusion triggered billions in mandatory purchases by ETFs, mutual funds and individual investment plans.
Why divide the aristocrats? Dividend Aristocrats are mature blue-chip stocks with lower growth prospects and stable cash flow. The cash flow allows them to pay dividends and increase the distribution every year, and all have been increasing for at least 25 years. Dividend aristocrats offer stable income, inflation-fighting distribution increases, and some insulation from market volatility. Dividend aristocrats are buy-and-hold stocks, which tend to trade at a lower beta than most stocks, a fact that reduces short-term portfolio volatility and amplifies long-term gains.
Diversification supports Fastenal’s growth
Fastenal had a difficult quarter, with weaknesses in some areas offset by strengths in others. The bottom line is that diversified operational quality delivered 1.9% revenue growth and marginal earnings growth, helping to support balance sheet health and dividend security. Revenue of $1.89 billion fell short of Marketbeat’s consensus, but by a slim margin, and there is a pivot to accelerated results expected later this year.
Fasteners were the weak link at the product level, with a 4.4% decline offset by an 8.3% increase in Safety and a 3.9% increase in Other. As for end markets, the manufacturing sector grew 2.6%, offset by a 6.6% decline in non-residential construction and a 2.5% decline in retailers. The others grew by 7.7%. In terms of company size, domestic account sales grew 6.5% and foreign account sales decreased 4.5%.
Margin news is also tepid, with a contraction in gross margin and an increase in SG&A expenses. The result, however, was less negative than feared and left GAAP Earrings at 52 cents or in line with last year. Ultimately, 52 cents is enough to support the outlook for this year’s earnings, which is enough to support a healthy balance sheet, invest in businesses and pay dividends.
Highlights from the balance sheet include an increase in liquidity, assets are increasing, debt is stable and equity grew 2.5%. Based on these metrics, the outlook for the year, and the precedent set last year, it can be expected that Fastenal will make a semi-aggressive distribution increase at the end of the year and may even issue another special dividend.
Analysts support the fastener market, higher prices are indicated
Fastenal’s five analysts tracked by Marketbeat pegged it at Hold but raised their price target. The consensus target of $68 lags markets, suggesting the decline will bring the stock price back to a “fair” value, but does not fully reflect the latest activity. The most recent revision was from Stifel Nicolaus, who raised the target to $85 before the report was published, setting the new high target for the stock. The second-quarter release may not spur analysts to make new revisions, but it also doesn’t suggest that sentiment will falter.
The technical action suggests that the market will return to the consensus level or lower. The market is down 5% and showing buy signals, but not enough to sustain support at current levels. If this does not change by the end of the session, FAST is very likely to move towards the $68 level, where it will present higher yield and better value, and solid support is expected.
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