Fastenal Company (FAST, Financial) reported its second quarter earnings on July 12: first-half 2.6% sales growth to $2 billion and -3.8% profit growth to $257.7 million on a year-on-year basis.
Fastenal’s share price closed -3.46% that day while the broader Standard & Poor's 500 closed almost flat at 0.7% change.
(Read: Fastenal Company Reports 2016 Second Quarter Earnings)
On a quarterly basis, Fastenal grew its total employee count by 4.1% to 20,324 year on year. Fastenal also grew its Industrial vending machines (1) by 15.3% to 58,346. In contrast, Fastenal’s store locations had a change of -0.4% to 2,605 stores.
(Fastenal, Annual Filing)
Fastenal, as can be observed, has been busy expanding its business. For the past five years (fiscal 2011 to fiscal 2015), the company had a sales and profit growth average of 11.3% and 14%.
(Fastenal, Annual Filing)
Valuations
According to GuruFocus data, Fastenal had a trailing 12-month (ttm) price-earnings (P/E) multiple 22.9 times (industry median of 15), price-book (P/B) value multiple 6.2 times (industry median 1) and price-sales (P/S) multiple 2.97 times (industry median 0.42). The company also had a ttm dividend yield of 2.94% with a payout ratio of 66% and a share buyback ratio of 0.8%. Fastenal has a five-year dividend growth rate of 20%.
(Fastenal, Annual Filing)
Market performance
According to Morningstar data, Fastenal had a total return of 4.5% in the past five years while the S&P 500 performed 14.4%. Fastenal also underperformed the broader market year to date with 0.37% and 6.3%.
Fastenal Company
In its filing, Fastenal began its business in Minnesota about 49 years ago as a partnership. The company began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small, medium-sized and, in subsequent years, large cities. Fastenal sells industrial and construction supplies to end users (typically business to business) and also has some "walk-in" retail business. In addition, the company does business online with its domain www.fastenal.com.
As shown in the image below, the company owned 2,622 stores that operated worldwide as of fiscal 2015. The company has a three-year (fiscal 2013 to fiscal 2015) store growth average of -0.37%. About 88%, or 2,300, was located in the U.S. In fiscal 2015, Fastenal had 11% of its total sales from abroad, with half of it coming from Canada alone.
(Fastenal Stores, Annual Filing)
Fastenal has several versions of its stores: traditional store (2), overseas store (3), strategic account stores, strategic account sites, and Onsite locations (4).
Fastenal believes that based on the demographics of its marketplace in North America there is sufficient potential for the marketplace to support at least 3,500 total Fastenal stores. Nonetheless, Fastenal admitted that it has slowed its store openings in recent years and instead has increased its investments in other growth drivers such as people (both inside and outside its stores), industrial vending and end-market growth investments.
In 2008, Fastenal displayed two prototype (industrial vending) machines at its annual customer expo, signaling the debut of its vending program. Despite its high-cost and labor requirements, Fastenal was able to grow it like mushrooms over the past years. The machine count grew from just over 7,000 in 2011 to 58,346 in June 30.
Fastenal believes that industrial vending is the next logical chapter in its business story. The company also believes it has the potential to be transformative to industrial distribution, both because of its benefits to Fastenal’s customers such as reduced consumption, reduced purchase orders, reduced product handling and 24-hour product availability, and its benefits to Fastenal in that it allows the company to strengthen its relationships with its customers and streamline the supply chain.
Fastenal believes it has a "first mover" advantage in industrial vending and is investing to maximize this advantage.
(Why Vending? YouTube)
Fastenal sells fasteners and other industrial and construction supplies, many of which are sold under the Fastenal® product name. The fastener product line consists of two broad categories: threaded fasteners and miscellaneous supplies and hardware (5).
According to Fastenal, threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures. Threaded fasteners accounted for Fastenal’s (approximately) 90% of the fastener product line sales in the past three years (fiscal 2013 to fiscal 2015). The segment also contributed 34% in its fiscal 2015 total Fastenal sales.
(Fastenal, Annual Filing)
Cash, debt and book value
As of June 30, Fastenal had a total cash of $155.5 million. The company also had a total debt of $430 million with a debt-equity ratio 0.23 times. Fastenal does not seem to carry in goodwill or intangibles in its balance sheet having had a book value of $1.87 billion.
Cash flow
(Fastenal Cash Flow, Quarterly Filing)
In the first half of fiscal 2016, Fastenal grew its cash flow from operations by -5% to $248 million. This was brought by increases in inventories and accrued expenses. Fastenal allocated $88.7 million in capital expenditures leaving it with $159.3 million in free cash flow.
Fastenal borrowed $435 million in credit facility but also reduced its borrowings by $370 million. The industrial and construction supplies distributor also allocated $232.6 million in dividends and share repurchases in that time period.
For the past three years, Fastenal had a free cash flow payout of 129.6% with its highest in fiscal 2015 at 158.3%. Notably, Fastenal’s share repurchases cash allocation jumped by 453% to $293 million in 2015. Meanwhile, its annual fiscal 2015 P/E multiple was at 23 times during that time, according to GuruFocus data.
(Fastenal, Annual Filing)
Conclusion
Fastenal has been able to deliver satisfying business growth over the past half century. The company continues to innovate, including its industry vending machine, to support the ease of selling its products to customers. Although Fastenal’s total return was lower than that of the broader S&P 500, the company continues to deliver dividend growth and had been more actively reducing its overall share count.
(Fastenal Share Price, Google Finance)
Fastenal’s valuation compared to its peers may indicate it is not a good buy right now. Observing its price movements over a five-year period, meanwhile, made me think otherwise.
Most analysts ranked Fastenal’s shares at either neutral or underweight. Barclay’s, observably, had a range price target between $29 and $38 and had Fastenal shares on underweight.
Analysts also estimated that the company would be able to deliver earnings per share of $1.74 this fiscal year. In my estimates, this would bring a value of at least $53 a share for the company (6). Asking a 20% margin of safety from this would give a value of $42 a share, which more or less is near Barclay’s range.
In summary, Fastenal shares would be a HOLD.
Notes
(1) Here is Fastenal Chairman Willard Oberton explaining Fastenal’s industrial vending in 2014.
(2) Annual filing: traditional Fastenal store services a wide variety of customers and stocks a wide selection of the products Fastenal offers.
(3) Annual filing: overseas store focuses on manufacturing customers and on the fastener product line (this is the type of store format Fastenal typically have outside the United States and Canada).
(4) Annual filing: A strategic account store is a unique location that sells to multiple large customers in a market. Because this location sells to multiple customers, it is included in Fastenal’s store count.
A strategic account site is essentially the same, but it typically operates out of an existing store location, rather than a unique location; therefore it is not included in Fastenal’s store count.
An Onsite location is a selling unit located in or near a customer’s facility that sells product solely to that customer. Onsite locations are not included in our store count numbers as they represent a customer subset of an existing store.
(5) Annual filing: threaded fasteners are such as bolts, nuts, screws, studs, and related washers.
Miscellaneous supplies and hardware are such as various pins and machinery keys, concrete anchors, metal framing systems, wire rope, strut, rivets, and related accessories.
(6) I used five-year earnings multiple and the forecasted earnings-per-share to arrive at the value.
Disclosure: I do not have shares in any of the companies mentioned.
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