Fast-growing FAST
Elise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Update: As predicted, at 5:30 pm on Tuesday, Fastenal declared a dividend of seventeen cents per share to shareholders of record on February 1. Last quarter's dividend was fourteen cents pers hare.
Update: At 8:00 AM, revenue for the quarter came in at $698M (as I predicted) and earnings were thirty cents per share; in line with estimates. Share prices immediatly dropped to $45.40 (almost 3%) in pre-market trading.
In case you think investing in an industrial supplier is about as exciting and slow as watching paint dry, take a look at Fastenal (NASDAQ: FAST), which will report on Wednesday at 8:00 and has an annual earnings call later that morning. Shares reached their all-time high on Friday and closed a few cents below it at $46.59. This rise now implies a high P/E of 41 (based on last-years' earnings) and the price to free cash flow ratio is 51, compared to an industry average of 21. Fastenal has a history, though, of rich valuations: its value is up a whopping 57% over the past 52 weeks and 450% over the past 10 years.
How do the people at Fastenal do it?
Fastenal is a $13.75B company that sells a wide variety of industrial and construction supplies such as threaded fasteners, tools, accessories for hydraulic and pneumatic power, welding supplies, electrical supplies, metals, alloys and materials, chemical and paint products, etc..
The managers clearly recognize that “time is money” to their customers and have found a way to get their products to customers immediately so that they don’t have to wait until tomorrow, when a web order can be delivered, or until someone gets back from running to a store across town. Over 50% of their revenue stems from selling 400,000 types of fasteners. These small, extremely inexpensive products can halt production if they are not on hand. Consequently, customers are typically not as concerned about prices as they are about accessibility.
Fastenal has 2,600 stores, primarily in North America and it is expanding operations in Central and South America, Europe, and Asia, including Singapore. It has recently started a “vending machine” program for industrial shops and factories. These are a real 21st century solution to small parts inventory. The machine tracks and controls individual purchases by cost center (or any other customer-defined criteria), automates ordering when a particular item runs low, and improves productivity by providing round-the-clock access to products at the point of use. Fastenal owns the products until they are dispensed.
One criticism I have heard is that the vending machines' inventory tracking features will lead to customers implementing cost-cutting measures, including reduced consumption, that will hurt FAST's bottom line. I wonder if the person who suggested that has ever worked 24/7 on a deadline for a project that requires Fastenal's products? There was a time in my life when I could frequently be found in a hardhat either in a drydock with rats scurrying around and a ship overhead or working on a cold rolling ship with cranes moving 800 pound railroad wheels around while we fastened shackles to wire rope and instrument cages. As someone who went to sea, I imagine that our deadlines were as rigid as an tough plant supervisor's could be. Once the ship, costing tens of thousands of dollars per day to operate, sets sail, it is not going to turn around because someone was too cheap to buy a few extra cotter pins. As we all know... "For want of a nail the shoe was lost, for want of a shoe the horse was lost... so a kingdom was lost - all for want of a nail." Providing customers what they want, where and when they want it, widens Fastenal’s moat in an industry where customer-switching costs are very low. Net margins have been consistently rising and are now 12%; Fastenal knows how to ring out a dollar.
The business is, of course, heavily dependent on the general state of the economy and on manufacturing and construction in particular. While the company were adversely affected by the recession, in 2010, it had generated approximately $2.2B in revenue and in the first 11 months of 2011 it had already had generated $2.5B in revenue. Both October and November reported over 20% year-over-year increases.
Returns on invested capital have averaged over 16% in the past 10 years and the return on assets has averaged 18%. Their asset turnover ratio,1.69, (down from its high of 1.76) is the lowest of its competitors and thus it is efficiently generating sales. Fastenal carries no long term debt and has a quick ratio of 2.7 and a current ratio of 6.7. It holds $76M in cash; liquidity is not a problem.
It has consistently paid a dividend over the past twenty years and has increased it for the past 12 year; Its current annualized amount of 65 cents per share reflects a yield of 1.3%. There is plenty of room for this dividend to grow, the payout ratio is under 50%.
Fastenal has excellent financial disclosure policies and no takeover defenses. Their compensation is reasonable (their total compensation for their executives is well under $10M) and bonuses demonstrably follow company’s results. Their CEO was named Morningstar’s CEO of the year in 2006; he joined Fastenal over thirty years ago and has been CEO for the past 9 years.
The company is richly valued and may feel a minor correction: Schaeffers’ put/call option interest ratio (SOIR) now stands over 2.3 and, over the long weekend, the bid/ask spread is centered two dollars below Friday’s closing price. Nevertheless, the company is very strong and has an excellent track record. It survived the recession in a strong position and has recently added some large customers like Kimberly Clark and 3M while also eyeing government contracts and expansion overseas. While the P/E ratio looks high right now, if annual earnings come in at an expected $1.21, then the P/E ratio at Friday's closing price will be 38.5, which is inline with lat year's valuation. Based on the company's solid financials and sound business decisions, I expect this company will continue to outperform for quite a while and I predict that revenue for the quarter will come in at $698M and earnins will be $91.5M. I own an infinitesimal number of shares in FAST and wish I had more.
Elise owns shares in FAST.
