Question:
I had a question on Fastenal (NASDAQ:FAST) — your thoughts on its net margins as the company pushes into non-fastener products and larger customers. And then maybe a little bit on Fastenal versus Grainger.
Chase Sheridan:
I will start with the margins. There has been a lot of discussion around gross margin because Fastenal’s average customer size has been ... its large customers have been growing faster than the rest of the business; so the gross margins have been coming down a little bit. Fastenal has gross margins north of 50%, which is almost unheard of in industrial distribution. Fastenal’s operating margins are north of 21%, which is also highly unusual. I expect the gross margins to come down over time. But I expect the operating margin to rise over time. That is because it is more efficient to serve these larger customers. Management makes that argument on a quarterly basis when it reports its result. Management always tries to talk about how its average revenue per store is growing.
When we first bought it, Fastenal was growing the store base rapidly. In its early days, Fastenal was growing its store base by over 30% a year and it was still growing by 14% when I joined the firm in 2006. That growth rate is now zero. So the company does not have a lot of low volume new stores depressing its margins. As a result, as the existing store base grows in terms of the average sales per store, those stores become more efficient.
The second part of the question was how do we think about Fastenal versus Grainger. We like both businesses. We follow Grainger closely. It is an excellent business with a wide moat. Jim Ryan at Grainger has done a very good job. It is tempting to say we could own both of them. So far, we just own Fastenal, though.
Question:
Do you find it more difficult today to find good stocks? Because it is lucky if you find one good stock a year. A Picasso sold this week for something astronomical. Why is it that wealth cannot find a good home in a stock and instead goes into art? It is harder and harder, it seems, to find — absent technology stocks — a good investment today. Am I wrong?
David Poppe:
Yes, it is definitely harder to find good stocks today. The market has gone up, has compounded 14% a year for the last five years through April 30. I think we are up about 17% a year over that time. That is roughly a doubling in stock prices. You cannot say that it is probable that we are going to compound at 17% over the next five years. No one knows how we will perform. But we are in an environment where more modest returns going forward are more likely than what we have seen in those five years.
From Ruane, Cunniff & Goldfarb Investor Day 2015 Transcript Part II - Sequoia Fund.
