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Is Fastenal Moving Too Fast?
Fastenal (Nasdaq:FAST) reported 2011 first-quarter earnings on April 12. Earnings were 54 cents per share, up 42% from the 38 cents earned in the same quarter last year. Sales of $640 million were 23% above the $520 million generated in the year-ago quarter. Both figures exceeded analysts' estimates. Fastenal's strong earnings engine continues to fire on all cylinders. (To read more on analysts, check out What You Need To Know About Financial Analysts.)
TUTORIAL: Fundamental Analysis
One of a Kind
To say that this wholesaler and retailer of industrial and construction supplies has been an exceptional company over the past decade is to fail to fully give credit to this business. With the exception of 2009, Fastenal has grown sales every year since 2001. With the exception of 2009, net profits have also increased every year since 2001. Plus, the profits have grown; in 2001, Fastenal generated $70 million in net income on $818 million in sales. In 2010, Fastenal earned $265 million on just under $2.3 billion in sales. Net margins have increased to 11.7% from 8.6% over the same stretch.When a company can deliver as well as Fastenal has, a P/E ratio of about 30 doesn't mean much. In fact, this has been the average P/E ratio for this company for the last decade. Yet shares are up from an average of about $15 in 2001 to $64 today. What this suggests is that simple reliance on a P/E ratio has cost those on the sidelines. (For more, read Become Your Own Stock Analyst.)
Moving Too Fast?
Fastenal sells industrial and construction supplies through its network of more than 2,500 stores. The company has operations all over the world including North America, China, Mexico and Singapore. In essence, Fastenal sells the basic building blocks of industry including things like cutting tools, fasteners and electrical supplies. The company's specialization has enabled it to differentiate itself from superstores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Despite having stores that are significantly smaller than its big-box competitors, Fastenal's specialization allows it to offer many items not available at the superstores.
In 2011, the company plans to open between 150 and 200 new stores, an annualized growth rate of 6% to 8%. Historically, this is lower than what Fastenal was doing before the economy came unglued. Thus far, however, profits have not been letting up. Management has been able to successfully execute on its effort to drive greater sales, and hence operating leverage, from its existing stores. Currently, Fastenal shares trade for 36 times earnings, a peak multiple for this business. The company will have to continue executing flawlessly to command this multiple in the future. That being said, Simpson Manufacturing Company (NYSE:SSD), which has not had the same track record as Fastenal, commands a multiple of 48 times earnings. That comparison may be meaningless. Or it may mean that Simpson is more overvalued than Fastenal.
The Bottom Line
So far, Fastenal has not disappointed investors. I see no reason why this company can't continue to deliver in the future, taking shares along for the ride. The risk is that any blip in execution could be costly to investors today. (To read more on growth stocks, see Steady Growth Stocks Win The Race)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: Fundamental Analysis
One of a Kind
To say that this wholesaler and retailer of industrial and construction supplies has been an exceptional company over the past decade is to fail to fully give credit to this business. With the exception of 2009, Fastenal has grown sales every year since 2001. With the exception of 2009, net profits have also increased every year since 2001. Plus, the profits have grown; in 2001, Fastenal generated $70 million in net income on $818 million in sales. In 2010, Fastenal earned $265 million on just under $2.3 billion in sales. Net margins have increased to 11.7% from 8.6% over the same stretch.When a company can deliver as well as Fastenal has, a P/E ratio of about 30 doesn't mean much. In fact, this has been the average P/E ratio for this company for the last decade. Yet shares are up from an average of about $15 in 2001 to $64 today. What this suggests is that simple reliance on a P/E ratio has cost those on the sidelines. (For more, read Become Your Own Stock Analyst.)
Fastenal sells industrial and construction supplies through its network of more than 2,500 stores. The company has operations all over the world including North America, China, Mexico and Singapore. In essence, Fastenal sells the basic building blocks of industry including things like cutting tools, fasteners and electrical supplies. The company's specialization has enabled it to differentiate itself from superstores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Despite having stores that are significantly smaller than its big-box competitors, Fastenal's specialization allows it to offer many items not available at the superstores.
In 2011, the company plans to open between 150 and 200 new stores, an annualized growth rate of 6% to 8%. Historically, this is lower than what Fastenal was doing before the economy came unglued. Thus far, however, profits have not been letting up. Management has been able to successfully execute on its effort to drive greater sales, and hence operating leverage, from its existing stores. Currently, Fastenal shares trade for 36 times earnings, a peak multiple for this business. The company will have to continue executing flawlessly to command this multiple in the future. That being said, Simpson Manufacturing Company (NYSE:SSD), which has not had the same track record as Fastenal, commands a multiple of 48 times earnings. That comparison may be meaningless. Or it may mean that Simpson is more overvalued than Fastenal.
The Bottom Line
So far, Fastenal has not disappointed investors. I see no reason why this company can't continue to deliver in the future, taking shares along for the ride. The risk is that any blip in execution could be costly to investors today. (To read more on growth stocks, see Steady Growth Stocks Win The Race)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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