Highly Valued Fastenal Is Headed Lower, Fast Fastenal (NASDAQ: FAST) is a great company with a growing business but there is a problem. Trading at 37X its forward earnings it is very highly valued compared to the...

Strong Results No Balm For Fastenal Traders

Fastenal (NASDAQ: FAST) is a great company with a growing business but there is a problem. Trading at 37X its forward earnings it is very highly valued compared to the broad market and its growth isn't all that spectacular. While we aren't forecasting a major implosion of share prices it does look like the short-term traders are in control and are about to push this stock down to lower levels. Ultimately, this is going to open up another buying opportunity for the stock but there may be some pain for current shareholders to endure before that time comes.

Fastenal Beats On The Top And Bottom Lines

Fastenal did not have a bad quarter and in fact, beat the Marketbeat.com consensus estimates on the top and bottom lines. The problem is that $1.53 billion in revenue may be up 12.5% from last year and 20% versus 2019 but the 200 basis points of outperformance weren't enough to get the market excited. In our view, the results are better than they sound, however, due to one less operating day in the quarter.

On a daily sales basis, revenue is up 14.6% from last year on strength in most segments. The fasteners segment led with a growth of 24.2% while the Other category grew 12.8% and safety equipment sales fell 3.5%. The caveat is that pricing also paid a role in revenue growth and accounted for almost 500 basis points of the increase.

Moving down, there is more goods news but once again, not good enough to get the market excited. The company reported a 90 basis point improvement in gross margin and a 10 basis point improvement in the operating margin that put GAAP EPS at $0.40. This is down slightly on a sequential basis but up on a one and two-year basis and $0.03 better than the Marketbeat.com consensus estimate.

Fastenal doesn't give formal guidance but it looks like momentum is still building for the company. In our view, sales may slow in the coming year but should sustain at least high-single-digit increases versus 2021. More importantly, the company's outlook is positive in terms of its dividend which yields a market-beating 2.12% with the latest increase. The company raised the dividend by 10.7% to $1.24 annually and we see additional increases in the future. The company has been raising its dividend for 23 years and, while the payout ratio is high at 73%, the balance sheet is a fortress and margins are holding up well.

The Analysts Are On The Fence With Fastenal

The analyst's rate Fastenal a firm Hold. This is based on 5 analysts' ratings and comes with a price target of $56.40. The consensus price target assumes the stock is overvalued at this level but has been rising over the near, short, and long-term. The caveat is that estimates are on the rise but at a very slow pace, only 29% compared to some we've seen that are up triple-digits, and the pace has been slowing. Business outlook or not, with analyst sentiment so tepid we are not expecting a major turnaround in share prices right now.

Looking at the charts, shares popped on the release but resistance at the short-term moving average capped gains. Selling at the average pushed the price back down to their opening levels confirming the downtrend in price action that began in December 2021. Price action is technically above support but has set a new low in testing that support. For that reason and weakness in the indicators we are expecting to see shares of Fastenal move below $58 and down to the $56 level and possibly lower.