This Fastener Supplier is Still Pricey

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fastenal Company (NASDAQ: FAST) has seen some mixed signals of insider transactions since November. I’ve seen several articles mentioning that Daniel Florness, the company’s CFO, just bought 2,645 shares at an average price of $41.50 per share, with the total transaction value of nearly $110,000. However, dated in November, Robert Kierlin, the Independent Chairman, sold 200,000 shares, with the total transaction value of more than $8.3 million. So are insiders bullish or bearish?

Business Snapshot

Fastenal sells fasteners and other industrial and construction supplies in more than 2,500 stores globally, with the majority of the stores located in the US and Canada, via 14 distributions centers in North America. The product, which brought the majority of the revenue to Fastenal, is a threaded fastener, accounting for around 42% of the total sales in 2011. The good thing is that Fastenal sources its product from a diverse base of suppliers as well as customers. No single supplier took more than 5% of the company’s total purchases in 2011, and no single customer took more than 10% of the total revenue in the last 3 years. 

A decade of good growth and fascinating return

In the last 10 years, Fastenal has experienced continuous growth in top line, bottom line and its free cash flow.

In the last 10 years, its revenue has more than doubled, whereas its EPS has increased more than fourfold. The most impressive growth lies in its free cash flow. In 2004, the company generated only $5 million in free cash flow. Trailing twelve months in the third quarter of 2012, the free cash flow has increased up to $248 million.

Furthermore, in the last 10 years, Fastenal has demonstrated consistent double-digit return on equity and return on assets, while using little financial leverage. 

 

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

ROA (%)

14.61

13.9

18.43

20.09

20.64

21.13

22.67

14.01

18.98

22.7

Financial Leverage

1.12

1.13

1.13

1.14

1.13

1.15

1.14

1.11

1.14

1.15

ROE (%)

16.34

15.63

20.77

22.73

23.34

24.08

25.99

15.8

21.46

26.11

What a sustainable performance! The 10-year average ROA and ROE are18.7% and 21.3%, respectively. Trailing twelve months, its ROE, which is equivalent to its ROIC, is 26.64%.

The high return over time has been achieved without any leverage. As of September 2012, it had $1.66 billion in stockholders’ equity, $223 million in cash, and no debt. Currently, Fastenal is trading at $42.06 per share, with a total market capitalization of $12.46 billion.

Peers comparison

Trailing twelve months, Fastenal has the highest operating margin (21%) among its peers, including MSC Industrial Direct (NYSE: MSM)  (18%) and W.W.Grainger (NYSE: GWW) (13%). The operating margins of all three companies are higher than that of the industry average, only 8%. In addition, all three are paying somewhat equivalent dividend yields. Fastenal is paying a 1.8% dividend yield, whereas W.W.Grainger is paying 1.6% and MSC is paying a 1.5% yield. Among the three, Fastenal has the most expensive valuation, of 17.3x EV/EBITDA. The cheapest belongs to MSC, at only 9.4x EV/EBITDA, whereas the market is valuing W.W.Grainger at 10.8 EV/EBITDA.

Foolish Bottom Line

Indeed, Fastenal has delivered consistent returns over times for its business and for its investors. The other two peers also had a similar track record of consistent performance. However, Fastenal seems to be pricey at the moment, compared to its peers. I’d rather wait for more pull back in the stock before initiating any positions.

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of MSC Industrial Direct. Motley Fool newsletter services recommend MSC Industrial Direct. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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