Business trends have started to perk up as economic activity begins to buzz again in the US. March in particular was a strong month, as month over month sales were 7.4% better and more than made up for moderatedeclines in the first two months of the year. However, there are some headwinds facing the company as non-residential construction continued to drag on this quarter’s results sliding nearly 15%. This is a smaller portion of the company’s revenue mix than is manufacturing at just under 25% of revenue, but Fastenal management is not hopeful for improvement in this business until next year. Furthermore, fuel costs–which restrained Fastenal’s earnings growth in 2008–rose 16% in sequential quarters as gasoline price climbed higher.
While Fastenal improved earnings per share, cash flow from operations came in at $79 million, which is actually 16% lower than the $94 million they brought in a year ago. They did expand their store footprint by a net of 24 stores in the last quarter (opened 29, closed 5) well below their stated store opening goals, but they plan to return to faster growth in the second half of this year.
At Ockham, we have a Fairly Valued stance on FAST as of this week’s report, but it is getting close to the point of a downgrade to Overvalued. While fundamentals are improving after the recession hugely impacted results for the last few years, we have watched the stock advance well recently and we are starting to become skeptical of valuations. The stock hit a 19-month high on Tuesday, and year to date it has already tripled the return of the broad Nasdaq index. A simple forward looking P/E ratio shows the company is selling at more than 35x next year’s expected earnings, which already incorporate earnings growth of 22.5%.
On a price-to-cash earnings basis this stock has historical traded for between a 21.6x and 35.4x multiple, and the current multiple is near the high end at 34x. Similarly, price-to-sales per share is currently 3.8x, which is approaching the high end of the historically normal range of 2.6x to 4.3x. Based on the current fundamentals we have a rationally expected price range of $44 to $55 per share, and thus our methodology does not see much upside left. At this point, FAST investors have had a nice ride and may want to look to strategically reduce their exposure in this stock, especially if you believe fuel prices will continue to rise.
Ockham Research Staff