A Golden-Age For Fastenal?
I’ve heard (read I should say) that current conditions are a “golden age” for homebuilders. Pent-up demand, low inventory, streamlined businesses, and low-interest rates are combining in a way that means sustained, healthy business for the home builders for the next few years at least. In that paradigm, you might think building supply companies like Fastenal (NASDAQ:FAST) would be well-positioned to reap the benefits and they are. But that doesn’t make them a buy at these levels, at least not yet.
Fastenal reported its 3Q earnings and the results aren’t all that impressive. The company beat top and bottom-line consensus estimates but by so slim a margin as to not matter. The core drivers of growth are PPE products and the company’s push to vending machines which, frankly, I don’t think are enough to sustain long-term growth or the dividend by themselves. That said, business the core business isn’t all that bad and with today’s decline in share price, the stock is looking a little less expensive than it was just a day ago.
Fastenal Beats On The Top And Bottom Line, Barely
Fastenal gave a weak report only in that it failed to beat consensus by a wide margin. The $1.41 billion in top-line revenue came in a mere $0.01 billion or 0.7% above consensus versus much wider beats in the broader market. What investors need to remember is that it is still worth 2.5% growth on a YOY basis and fueling a very healthy dividend.
Moving down the report, gross margins came in at 45.3%, down 0.6% from last year, but also above consensus. The difference in margins is mostly due to product-mix and costs related to the pandemic. The bottom line results are equally tepid. GAAP Q3 earnings came in at $0.38 per share or up $0.01 from last year and $0.01 above expectations. On an operating basis, operating income is up 2.9% YOY for the quarter and 7.2% for the YTD period while EPS is up 3.4% and 8.0% respectively.
Regarding the quarter, the company said it was of normalization. The trends sparked by the pandemic are still in place but returning to more normalized levels. The company sees demand for PPE, safety, and sanitizing products staying high, though, and demand for its core products picking up.
Fastenal Pays A Safe, But Expensive, 2.0% Yield
Fastenal is no cheap stock trading at 32X earnings but it pays an incredibly safe 2.0% yield. The payout ratio is a little high at 68% but when you look at the balance sheet all worries will slip away. The company carries very little debt, the coverage ratio is well above 100, and there is ample free cash flow to not only cover the dividend but ensure at least a ninth year of consecutive annual increases. Based on the 5-year CAGR the next increase could be in the double-digits percentage-wise. The 3rd quarter payout was announced a day before the earnings release, in-line with the previous, but the next one should include an increase. The stock goes ex-dividend on October, 26th.
Fastenal Falls After Earnings And May Move Lower
Fastenal fell more than 5.0% after reporting 3Q earnings and it may fall a little more. The next target for support is near the $43 level now that the short-term EMA has been crossed. The indicators are still bullish so support may kick in at the $43 level. If not, this stock may move down to the $40 level or lower.