Bolt From the Blue Team!
Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As you enter one of the stores of the company I am going to analyze, you are faced with rows and rows of products that you can buy off the shelves. Fastenal (NASDAQ: FAST) prides itself from among other things, on its chain of 2600+ stores and more than 10,000 people operating them. Each of their stores is tailored according to the needs of the local customers, who visit these for any OEM and MRO supplies.
Let’s Unscrew the Nuts
Net income for Fastenal Company rose to $109.3 million (37 cents per share) vs. $96.8 million (33 cents per share) in the same quarter a year earlier. This implies a double-digit rise of 12.9% from the year-earlier quarter. The revenue also showed a double-digit growth of 10.4% to $802.6 million. Although the results fell narrowly short of the street expectations, it has been successful in maintaining its double-digit growth rate for the last five quarters.
A Look at the Vertical Markets
Construction numbers improved in the month of September, but since August was a slower period than expected, the jump in September balanced out the figures.
Manufacturing has been very consistent in its performance, which is a good thing to have as there no actionable steps required right now and things should pick up in the near future.
Metalworking is a new initiative that the company had taken up with the aim of achieving faster revenue growth. Though this isn’t a huge business as of now, they have exceeded their goals recently.
Vending had a solid third quarter where the company installed around 4000 machines and saw more participation at the store level. A good number of customer wins in this quarter and last, has convinced management to keep on investing money and efforts in this area.
Competitive analysis:
Among others, Fastenal indirectly competes with Lowe’s Companies (NYSE: LOW), the second largest home improvement retailer operating in the regions of US, Canada and Mexico. With small instances of recovery in the housing markets, it is expected that Lowe’s would do well in terms of its revenue numbers and hence, the net income figures. Lowe’s area of focus now should be on improving its customer service in the stores, which has been a point of criticism in the past few quarters.
Customer service on the other hand is a strength for Home Depot (NYSE: HD), which is currently the largest home improvement retailer in the US. The sales figures for the company have been consistent, while gradually increasing with the recovery in the housing sector. The company's positives can be seen in multiple areas, such as its solid stock price performance, impressive record of EPS growth, revenue growth and increase in net income.
MSC Industrial Direct (NYSE: MSM) is a supplier of metalworking, maintenance, repair, and operations tools and products. Its strengths lie in different areas like its relationship with over 2500 suppliers, which gives it substantial purchasing power, and its strategically set distribution centers, which facilitate the quick delivery of industrial supplies to clients.
Is This a Stock to Keep?
As mentioned above, Fastenal is now looking at new initiatives like metalworking and government business, where they have been exceeding their goals for growth and sales. In terms of Vending, Fastenal has really engaged well with the customers, which is translating into growth opportunities and brand loyalty.
Lets now make way to answer the important question of whether to hold the stock or not. The first metric that I would really like to know about is the kind of cash flows that the company is generating over time. The cash flow from operating activities has approximately doubled in the last nine months ended September 30 compared to the same period in the last year. The free cash flows for the company have experienced certain swings in the past years, but it has been increasing in recent times due to a reduction in capital expenditures and as for this quarter, they have spent around 27% of the earnings on Capex.
The return on equity for the company has been in the range of 20 to 25% and increasing in the past couple of years. This is attributed to the double-digit growth that the company is seeing in its revenue and profit numbers. The profit margin has also been expanding, though subject to certain swings, which the company should aim to stabilize.
In case you would have read my previous blogs, you would know that one of the other things I think investors need to consider while analyzing the stock is the attitude and beliefs of the management team running the company. In this case, an impressive point is that the management is concerned with its margins and has assured investors they are working towards increasing the margins across the different vertical markets. The team is aware of the fact that the goals are not being met when it comes to profit, and as such they need to work on shrinking expenditure and an effective price mix to up the margins.
The company has decided to payout a dividend of $0.21 in the fourth quarter. The stock is currently trading at a P/E of around 32, which is quite higher than the market average of around 20. This indicates that the stock is currently overvalued and hence it would not be advisable for you to build a new position in the stock.
MihirMehta has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend MSC Industrial Direct and The Home Depot. 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.If you have questions about this post or the Fool’s blog network, click here for information.
