Stock Analysis & Ideas

Fastenal Drops 5.7% on Softening Demand — What to Consider Now

Story Highlights

Slumping demand is starting to hit Fastenal hard. However, its incredible diversity of products and services can help the company weather a storm, allowing it to come roaring back when times are better again.

Industrial solutions supplier Fastenal (FAST) recently brought out its earnings report. The company noted some modest wins, but despite that, it is down about 5.7% so far today.

Fastenal’s earnings report featured earnings of $0.50 per share. That’s exactly what the Zacks estimates called for. The company fell just a bit outside its revenue projections, however. It posted revenue of $1.78 billion, though estimates called for $1.79 billion.

That isn’t a huge miss, but the company also reported that it was noticing reduced demand during May and June. That suggests Fastenal may be in for further hits down the line.

Calling Fastenal a canary in the macroeconomic coal mine might seem somewhat dramatic, but the aspersion therein is valid enough. That’s why I’m neutral on Fastenal; right now, things aren’t looking too bright, but that could change in short order.

Looking at its stock performance, Fastenal’s last 12 months have been volatile, to say the least. The company has had multiple peaks and valleys over the last 12 months, reaching as high as $64.75 per share before slipping back to today’s lefts.

Interestingly, Fastenal stock has lost about $5 per share from what it was this time last year, despite reaching the highs noted previously.

Wall Street’s Take on Fastenal

Turning to Wall Street, Fastenal has a Hold consensus rating. That’s based on two Buys, three Holds, and one Sell assigned in the past three months. The average Fastenal price target of $58.17 implies 23.4% upside potential.

Analyst price targets range from a low of $42 per share to a high of $70 per share.

Investor Sentiment is Still Mostly Positive

Despite the recent slump in the earnings report, investor sentiment is hanging in there in most respects. In fact, Fastenal has a ‘Perfect 10’ Smart Score rating on TipRanks, the highest possible level of “outperform.” This puts Fastenal as one of the companies most likely to outpace the broader market.

One of the biggest factors disagreeing with that assessment, though, is hedge fund involvement. In fact, hedge funds—based on the results of the TipRanks 13-F Tracker—reduced holdings in Fastenal by 342,100 shares last quarter. That’s the fourth consecutive quarter that hedge funds have pulled back on Fastenal ownership.

Granted, the pullbacks have been mild. A year ago, hedge funds owned about 7.659 million shares of Fastenal. Today, they own just over 6.862 million shares. These aren’t big losses, but they do add up somewhat over time.

Meanwhile, insider trading at Fastenal suggests plenty of confidence therein. Corporate insiders bought around $304,400 worth of Fastenal stock in the last three months.

In fact, so far in 2022, corporate insiders have done absolutely nothing but Buy Fastenal stock. You have to go back to November 2021 to actually find a Sell transaction. Over the last 12 months, Sell and Buy transactions are perfectly balanced at 15 each.

As for retail investors who hold portfolios on TipRanks, they’re increasingly disposed to buying Fastenal stock, though at a somewhat slower rate. In the last 30 days, the number of TipRanks portfolios holding Fastenal stock is up 0.7%. Over the last seven days, however, this number is up 0.4%.

Finally, there’s the matter of Fastenal’s dividend history. For the most part, it’s behaved how an income investor would most prefer. Payouts have been regular and have increased fairly regularly as well.

There have even been some special payouts from time to time. The company just announced plans to pay out a $0.31 per share dividend, which is in line with the last two payouts.

Who Needs Fasteners When the Factory is Closed?

Certainly, there are positive points about buying Fastenal. The regularity of its dividend is definitely a plus. The fact that it kept that dividend going through the pandemic is likewise a point in its favor. Even as the world collapsed into illness-driven uncertainty, Fastenal stuck to its guns. That’s got to win it some support.

However, there’s one major problem afoot for Fastenal, and we’ve been seeing it take place over the last two months. Declining demand is likely to be one of Fastenal’s biggest problems. Fastenal is focused on providing solutions to large-scale industrial users. Granted, it offers a staggering array of potential solutions, and that will certainly help.

Fastenal offers its customers solutions for every problem, from bandsaw blades and hose fabrication to industrial consulting services on safety solutions and metalworking support.

That incredible backfield of solutions would make it all but impervious to any economic downturn, except for that one big problem. Industrial users are Fastenal’s biggest target. If the industry ever takes a downturn, Fastenal must turn down with it because its clients aren’t buying.

Sure, Fastenal is working to head this off, especially in the short term. After all, the company just announced plans to repurchase an additional eight million shares of stock.

This adds to the one million shares previously bought back and an authorization to Buy another 2.2 million shares as well. Share buybacks, all else being equal, tend to raise stock prices as it reduces the number of shares outstanding and makes what’s left harder to Buy.

However, in this case, all else isn’t equal. Fastenal depends on industrial demand for that incredible array of services it offers. If industrial demand falls, so too does the demand for Fastenal’s products and services. It really doesn’t matter how wide the selection of options is; if the factories can’t afford it, then they won’t buy.

Granted, Fastenal can make a good case for itself. Buying some Fastenal services can serve to reduce expenses elsewhere. Offering a net gain to customers is usually a good way to sell a product.

After all, if a customer believes the value of a service or product is greater than the value of the cash currently held, they’ll buy the product. However, in a recession, the value of cash goes up substantially because of its sheer utility. Thus, businesses hang on to cash, as they may need it for something vital like tax payments.

Conclusion – Fastenal Can Fall More in the Short Term

There are plenty of positives to Fastenal. Its sheer range of services and products makes it a powerful force in resisting many economic downturns. Its stable and growing dividend suggests a company in good financial health. Even the broad range of investor sentiment that says this is an attractive Buy is worth noting.

However, Fastenal’s limited market may come back to bite it here. It really only sells to factories and industrial operations. Thus, a downturn in the industry means a downturn for Fastenal. It won’t be a complete loss, certainly. Some factories survive–even thrive–during downturns. However, it’s certainly going to be a downturn of some type.

That’s why I’m neutral on Fastenal. There’s a path to victory here, but there’s also a path to failure. In the short term, it’s more likely that Fastenal will lose ground, thanks to its primary market losing ground as well. Nonetheless, with any kind of industrial resurgence, Fastenal should come roaring back right along with it.

Disclosure

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