Fastenal FAST
September 25, 2015 - 4:11pm EST by
rjm59
2015 2016
Price: 36.71 EPS 1.75 0
Shares Out. (in M): 291 P/E 21 0
Market Cap (in $M): 10,700 P/FCF 0 0
Net Debt (in $M): 330 EBIT 0 0
TEV ($): 11,000 TEV/EBIT 0 0

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  • Industrial Equipment
  • High Barriers to Entry, Moat
  • Share Repurchase
  • Stable Management

Description

FAST has a growing business with strong barriers to entry, a proven management team, 3% dividend and an active stock buyback plan in place. All of this with marginal debt, and a stock price beaten down to its 4 year low on an absolute basis and 6 year low on an earnings basis. FAST also puts up a fairly impressive magic formula number, especially on the Return on Capital formula (87%). It also posts a 7% earnings yield.

FAST offers to customers what few other companies are truly capable of providing. With its 2700 company owned stores and 14 distribution centers, Fastenal’s close proximity to its customers allows the company to provide a range of services and product availability that competitors cannot easily match. Fastenal has grown from $162 million in sales in 1994 to $3.9 billion as of Q2 LTM.

Fastenal views their business as a combination of Fastener distribution (40.2% of 2014 Sales) and MRO Distribution. As edward965 put it 8 years ago, the last thing people want to skimp on when a machine is down is a nut, bolt or screw. That being said, their pricing continues to remain highly competitive. I would urge all of you to revisit edward965’s writeup for a more detailed download of the business itself. Clearly made a good exit recommendation in the middle of last year, but we believe now that its been beaten up, it represents an attractive entry point.

Its Vending segment, FAST Solutions, is its fastest growing segment by offering its customers reduced consumption, purchase orders, product handling, and 24-hour product availability. With 50,620 machines as of Q2 15, the Company is targeting 100K machines in the near future.

Fastenal has been plagued recently by down markets in non-residential construction, oil and gas, agriculture, broadly manufacturing, and the strong dollar. The Company has been resilient in controlling costs and maintaining margins in spite of these headwinds. While being reluctant to take any type of macro view, we believe that Fastenal well positioned when its end markets begin to rebound.

FAST is a bet that a Company that has resiliently grown for 21 years will continue to make the right decisions in any type of market. The Company recently grew EBIT margin by continuing to increase its sales / store through sales people additions (added 1,067 in the LTM).

Management

At the helm, you have a CEO and CFO that have been with the company since ’85 and ’02, respectively. Directors have purchased close to $500K worth of stock year to date. The team is capably managing capital (down 10% YTD) and operating expenses. We appreciate their thrifty strategy recently of investing in high ROIC investments (people, and vending) which translate directly to sales.

MRQ: we expect capital expenditures, relative to our net earnings, will moderate and will allow us to continue to fund our cash needs

Balance Sheet

The company has de minimis amount of debt with a current line of credit balance of $250 MM, and the shareholder friendly management team has been using its line of credit to scoop up equity (4 MM share buyback announced 3/15) given the historically low prices this year.

Margin of safety: clean balance sheet, stable to growing margins, real estate, experienced and prudent management

Risks: Amazon launched AmazonSupply in 4/12 by offering approximately 5 times what Fastenal offers online. It closed this business down to open up Amazon Business which offers free shipping on orders of $49 or more. Amazon has always taken aim at fatter margins across all industries, and we don’t expect them to stop here. Amazon, to a certain extent, appeals to a younger demographic that know exactly what they want and can wait a couple days for delivery. FAST reports their online sales in their 10-K as non-store sales. These have hovered around 13% in all 4 quarters of 2014. We recognize this as a long term impact to margin, but don’t forsee any significant effects over the next few years.

 

Global manufacturing headwinds already cited above

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Improved global dynamics

Continued growing sales and strong margin performance

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