Key Points
Fastenal had a challenging quarter, but its diversified model produced 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 a bottom will be reached soon, and longer-term gains are coming. 
5 stocks we like better than Fastenal
Dividend Aristocrat Fastenal NASDAQ: FAST fell about 5% after its Q1 release and may fall further. Not because the business is flagging but because the valuation has run up to unsustainable levels. This stock rose nearly 100% over the last two years, recently peaking at an all-time high, and correction is due. Much of the gains for this construction stock were made this year, about 3600bps, since January when the stock was included in the Dividend Aristocrats index, another factor in today’s decline.
Because of indexing, inclusion in the Dividend Aristocrat index is responsible for this year’s price run-up. Dividend Artistocrats are desirable stocks for the bulk of market participants and a heavily invested market segment. Its inclusion sparked billions in mandatory buying by ETFs, mutual funds and individual investment plans. Get Fastenal alerts:Sign Up
Why Dividend Aristocrats? Dividend Aristocrats are mature blue-chip quality stocks with lesser growth outlooks and stable cash flow. The cash flow allows them to pay dividends and raise the distribution annually, and all have increased 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 with a lower beta than most, a fact that reduces near-term portfolio volatility and amplifies long-term gains. 
Diversification Sustains Growth for Fastenal 
Fastenal had a challenging quarter, with weaknesses in some areas offset by strengths in others. The takeaway is that the diversified operational quality produced 1.9% top-line growth and a marginal increase in earnings, helping sustain balance sheet health and dividend safety. The $1.89 billion in revenue is short of the Marketbeat consensus but by a slim margin, and there is a pivot to accelerated results expected by year end.Fasteners were the weak link product-wise, with a decline of 4.4% offset by an 8.3% gain in Safety and a 3.9% increase in Other. Regarding the end markets, Manufacturing grew by 2.6%, offset by a 6.6% decline in non-residential construction and a 2.5% decline in Reseller. Other grew by 7.7%. In terms of business size, National Account sales grew by 6.5% and non-national fell by 4.5%. 
Margin news is also tepid, with gross margin contracting and increasing SG&A expenses. The result, however, was less bad than feared and left the GAAP earrings at 52 cents or flat compared to last year. Ultimately, 52 cents is sufficient to sustain the outlook for this year’s earnings, which are enough to sustain a healthy balance sheet, invest in business and pay dividends. 
Balance sheet highlights include a cash build, assets are up, debt is flat and equity grew by 2.5%. Based on these metrics, the outlook for the year, and the precedent set last year, Fastenal can be expected to make a semi-aggressive distribution increase at the end of the year, and it may also issue another special dividend. 
Analysts Support the Fastenal Market, Higher Prices are Indicated
The five Fastenal analysts tracked by Marketbeat have it pegged at Hold but have been raising the price target. The consensus target of $68 lags the markets, suggesting the downturn will return the stock price to a “fair” value, but it doesn’t fully reflect the most recent activity. The most recent revision was from Stifel Nicolaus, which upped the target to $85 ahead of the report, setting the new high target for the stock. The Q2 release may not spur the analysts to make new revisions, but neither does it suggest sentiment will falter. 
The technical action suggests the market will return to the consensus level or lower. The market is down 5% and shows signs of buying, but not enough to sustain support at current levels. If that doesn’t change by the end of the session, the odds are high that FAST will move down toward the $68 level, where it will present a higher yield and better value, and solid support is expected. 
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