Figuring-Out Fastenal (FAST)

 

Fastenal (FAST) sells industrial and construction supplies at over 2300 stores mostly in North America.  According to the S&P Stock Report, FAST sells an impressive array of products: 350,000 different types of threaded fasteners, 120,000 different types of tools, 200,000 different cutting tools and abrasives, and 134,000 other products.

 

FAST changed its business model in 2007 to slow the growth of new stores from 14% to 7-10% per year, and to increase sales staff and the size of its existing stores.  The new strategy seeks to substantially increase FAST’s sales per store and profit margins, and seems to be working well: for the last 3 quarters, Sales, EPS and Pre-Tax Profit have all increased.

 

Unlike HD and LOW, two other retail building supply chains, FAST fell much more in price during the last 6 and 3 months (20% and 23%), and is currently selling close to its 52 week low. 

AnnC led a SSG Workshop on Fastenal at the recent Puget Sound Investor Fair.  Participants made the judgments while Ann led the discussion and prepared the write-up for Better Investing’s First Cut.  Here is a comparison of the Workshop’s SSG with mine and with Take Stock.

Fastenal (FAST)	Puget Sound Workshop      led by AnnC	ArminF	Take Stock
Date	11-19-08	12-29-08	12-29-08
Data	S&P	same	Hemscott
Price	$32.44	$32.34	same
52 week High & Low Price	$56.48 & $31.52	same & $30.08	n/a
Project Growth From	Last Quarter	Last Quarter	Last Annual
Sales Growth	10.00%	14.00%	13.80%
EPS Growth	10.00% [see A]	13.40% [see B]	11.80%
High PE	21.0 [see C]	25.0 [see D]	30.0
High EPS	$3.01	$3.51	$2.70
High Price	$63.20	$87.70	$80.97
Value Line Estimated High Price =  $65-95 @ $33.35 as of 1-2-09 and  $65-100 @ $52.10 as of 10-3-08
Low PE	13.0	16.2	16.7
Low EPS	$1.87	$1.87	$1.70
Low Price	$24.30 (low EPS x low PE)	$18.00 (60% x 52 week low)	$28.39
Upside/Down	3.8	3.9	12.3 (imputed)
Total Return	15.5%	22.7%	21.5%
SSG Buy Under	n/a	$35.46	$41.54
RV/PRV	56.9/51.9 (2003 High PE out)	57.1/50.3 (2003 High & Low PE out)	n/a
Quality	n/a	S&P = A (A+ is tops)	TS = 6.8 (excellent)
PTPM – 5 yr ave	16.9% trend up	same [see E]	16.8% trend n/a
ROE – 5 yr ave End Equity	19.9% trend up	same [see E]	n/a
ROE – 5 yr ave Start Equity	n/a	22.9% trend up	22.9% trend n/a
Debt to Equity – 5 yr ave	n/a	-0- trend even	n/a

 

 

[A] The Puget Sound workshop estimated Sales and EPS growth at 10.00% for the next 5 years because they wanted to be conservative.  The trouble with “being conservative” is that it does not explain why the participants chose 10% and not more or less, not 15% or 8% for example.

 

They knew that FAST’s historical growth has been substantially higher than 10.00%.  Sales and EPS have grown an average of 16.6% and 17.7% over the last 10 years, increasing to 19.1% and 28.6% over the last 5, and decreasing slightly to 18.3% and 22.9% last year in 2007. By comparison, 15.0% seems reasonably conservative.

 

They also checked five analysts (Morningstar, Value Line, S&P, Manifest Investing and YahooFinance) and were aware that most were estimating more than 10.00%.  Unfortunately, they didn’t say how much more.

 

[B] When I did my SSG, the six analysts I checked were estimating long-term EPS at an average of 15.94% with Zacks low at 13.40% and S&P high at 18.50%.  Reuters via Morningstar was 15.10%, First Call via Yahoo Finance was 15.13%, Value Line was 16.50%, and FactSet Call Street via CNN Money was 17.00%.  FactSet’s estimate was from 6 analysts who ranged from 20.0% high to 5.0% low.

 

I used 13.40%, from Zacks and the lowest of the six analysts.

 

[C] The Puget Sound workshop also was conservative in deciding to use 21.0 and 13.0 as the Forecast High PE and Low PEs.  Again, they don’t explain how they decided those estimates. 

 

FAST’s historical PEs for the past 4 years averaged 36.8 and 23.8.  Its lowest PEs in the past 10 years were 34.1 and 21.4 last year in 2007.  Value Line is estimating a PE of 25.5 for the next 3-5 years which is way not as “conservative” as Puget Sound’s 17.0 (21.0 + 13.0 / 2 = 17).

 

[D] I used 25.0 for my Forecast High PE, down from 30.0 in my prior SSG, because Value Line lowered its Estimated High Price to $65-95 and I did not want my Forecast High Price (High PE x High EPS = $87.70) to be at or over the high end of VL’s estimate.

 

On the other hand, the Puget Sound Forecast High Price ($63.20) was slightly less than the low end of VL’s estimate.  That’s not unreasonably low, but their conservative judgments meant that they no longer had a SSG Buy when FAST’s price rose two days later.

 

Instead of “conservative”, I believe a far better standard is “reasonable by comparison” which I explain in an earlier post: Determining What’s Reasonable and What’s Not, July 13, 2008.

 

[E] FAST’s 5 year average Pre-Tax Profit Margin (PTPM) with S&P data was 16.9%, substantially higher than its industry average of 9.6%.  However, its 5 year average Return on Equity (ROE) was 19.9%, which looks good, but was substantially less than its industry average of 26.0%.  Again, comparisons provide a solid basis to help us decide what’s good and what’s not.

 

-Armin

 

 

Monitoring Microsoft (MSFT)

 

 

 

Microsoft (MSFT) is the world’s largest maker of computer software with 2008 revenues of $60.4 B (up 18%).  Morningstar reports that Windows and Office software account for roughly 60% of MSFT’s revenue with another 22% coming from enterprise server software.

 

Microsoft is a large, mature company which, contrary to conventional wisdom, continues to grow both sales and earnings.  Its 5-year average Sales was 13.2% which increased to 18.1% in 2008 while EPS increased from 18.2% to an impressive 31.7%.

 

The company is remarkably profitable with a 5-year average Pre-Tax Profit Margin of 42.4%, nearly 2.5 times greater than its industry average of 17.3%.  According to Morningstar, MSFT generates more than $1Billion in cash each month and, after buying back $40Billion of its stock over the last two years, still has a whopping $30Billion in cash.

 

While MSNMoney.com is an excellent website (especially its free Custom Deluxe Stock Screener), MSFT’s Online division lost money in 2007.  That’s probably why Microsoft offered to buy Yahoo! in early 2008 for $44.6B or $31 per share, and may try again next year.  However, Morningstar believes that would be “an unmitigated disaster” and suggests other acquisitions that would better compliment Microsoft’s core strengths, such as SAP (enterprise software) or RIMM (the Blackberry mobile phone).

 

In late 2008, Microsoft finally opened an online store where customers can conveniently buy all of the company’s products.  Most of its software is now available for download and all of it can still be bought in a box.

 

Software as an online service directly challenges MSFT’s old business model which sold everything in a box.  Microsoft and the software industry is changing, and Wikinvest reports that revenues from all online software is expected to grow from 5% to 25% in the next three years.  Moreover, Microsoft’s latest version of its Office software will offer online versions of Word, Excel and PowerPoint that can be edited and managed by a computer, a web browser, or a mobile phone.

 

Unlike Apple, Microsoft does not have a reputation for innovative products, snazzy design, or technological excellence.  Opening an online store is hardly a major break-through. And, Morningstar is surprisingly pessimistic about MSFT’s ability to prosper in the long, long term, estimating 8.3% average growth over the next 5 years and fading to merely 3.0% after 2012. 

 

“[I]n the long term, the services model will change

industry economics such that Microsoft’s growth

slows to inflation and its returns fade to match its

cost of capital.”

 

Here’s a comparison of AnnC’s SSG from BI’s First Cut with two of mine and with Take Stock.

 

Microsoft (MSFT)	AnnC	Take Stock	Armin-1	Armin-2
Date	10-3-08	10-22-08	9-30-08	11-21-08
Data	S&P	Hemscott	S&P	same
Price	$26.32	$23.36	$26.15	$19.68
52 week High & Low Price	$87.50 & $23.50	n/a	$37.50 & $23.50	$36.72  $17.50
Project Growth From	Last Annual & Last Quarter are same (A)	Last Annual	Last Quarter	same
Sales Growth	09.00%	12.50%	09.00%	same
EPS Growth	09.20% (B)	09.30%	09.00% (D)	same (E)
High PE	21.5 ave High PE after 2 outs	24.7	20.0 2008 lowest in last 5 yrs	15.0
High Price	$62.60	$72.25	$57.60	$51.90
Value Line Estimated High Price = $50-60 at $21.20 on 11-21-08 and $55-65 at $28.12 on 8-22-08
Low PE	12.0 (C)	18.6	14.5	10.9
Low Price	$21.00 80% x current price	$34.60	$22.20 recent severe low	$10.50 60% of 52 week low
Upside/Down	6.8		8.0	3.5
Total Return	20.1%	27.1%	31.4%	40.5% (untrust- worthy)
SSG Buy Under	n/a	$39.09	$31.07	$20.85
RV & PRV	75.3 & 68.9 (2 outs)	n/a	74.7 & 68.6 (2 outs)	46.8 & 43.1 (2 outs)
RV & PRV (no outs)	n/a	n/a	63.8 & 58.5	39.9 & 36.8
Quality	n/a	TS = 5.8, excellent	S&P = B+	same
PTPM – 5 yr ave	42.2% trend even	39.0% trend n/a	42.4% trend even	same
ROE – 5 yr ave End Equity	32.2% trend up	n/a	32.2% trend up	same
ROE – 5 yr ave Start Equity	n/a	29.6% trend n/a	30.7% trend up	same
Debt to Equity – 5 yr ave	n/a	n/a	-0- trend even	same

 

(A) My SSG file contains data for 4 Qs 2008 and for 2008 annual so starting growth projection at last Quarter or last Annual makes no difference;

 

(B) Ann explains in her SSG from First Cut that she relied on the Preferred Procedure for her 9.2% estimated EPS, even though it was less than the analysts.

 

- For her PP, Ann used 9.00% as her Sales estimate which she said was between 8.3% from Morningstar’s and 10.2% from VL & Yahoo-Finance.  However, when I checked on 10-22, Yahoo-Finance was estimating Sales next year at 9.2% (not 10.2%) and VL was estimating Sales per share at 17.0% (not 10.2%) for the next 3-5 years.  Zacks, the only source that estimates Sales for the next 5 years, was estimating 11.29%.

 

- Moreover, if Ann had just used the VL estimate for Shares Outstanding, her PP would have increased to 13.5% EPS. 

 

(C) For her Forecast PEs, Ann reduced her Low PE from its 15.6 average to 12.0, because of our “very pessimistic market”, but used her High PE average of 21.5.  In contrast, I never adjust one High or Low PE without modifying the other.

 

(D) When I did my SSG on 9-30, the six analysts I always check were estimating long-term EPS at an average of 12.58% with VL high at 17.00% and First Call via Yahoo Finance low at 11.19%.  Zacks was 11.29%, and three were 12.00% (S&P, Reuters via Morningstar, and FactSet Call Street via CNN Money).  No estimate had changed when I checked again on 10-22.

 

(E) When I updated my SSG on 11-21, these six analysts were now estimating long-term EPS slightly lower at an average of 12.26 with VL still high but lowered to 15.50% and First Call via Yahoo still low and still the same at 11.19%.  Zacks was still the same at 11.29%, Reuters via Morningstar was slightly lower at 11.60%, and FactSet CallStreet and S&P were still the same at 12.00%.

 

CONCLUSION:

MSFT has continued to drop in price and, even though I lowered my judgments considerably, I consider my SSG untrustworthy primarily because of its unusually high Total Return of 40.5%.

 

 

 

 

- Armin 

Oogling Google (GOOG)

 

Google (GOOG), the Internet mogul, has dropped in price some 44% in the last six months and 25% in the last three, as of today December 10th. Between my two SSGs, GOOG’s price fell a whopping 54%. 

 

Does anyone ogle Google?  Maybe now is a good time to buy this stock?

 

Here’s a comparison of three analyses, my prior and updated SSGs as well as a recent one by AnnC.

 

Google (GOOG)	AnnC	Armin-1	Armin-2
Date	11-28-08	5-21-08	11-21-08
Data	S&P	S&P	same
Price	$292.96	$565.76	$262.43 (down 54%)
52 week High & Low Price	$724.80 & $247.30	$747.24 & $412.11	$724.80 & $247.30
Project Growth From	Last Quarter	Last Quarter	same
Sales Growth	15.0%	n/a	18.00%
EPS Growth	10.2% (see 1 below)	25.00%	12.00% (see 2 below)
High PE	26.0	30.0	same
High EPS	$25.78	n/a	$28.00
High Price	$630.30 (140/sh or 18% < VL’s low end)	$1302.50	$840.00
Value Line Estimated High Price = $770- 1150 as of 11-21-08 and $925-1385 as of 5-23-08
Low PE	12.0	14.6	same
Low EPS	$15.89	n/a	$15.89
Low Price	$190.70 (Low PE x Low EPS)	$207.80 (Low PE x Low EPS)	$148.40 (60% x 52 week low)
Upside/Down	3.7	2.1	5.1
Total Return	18.0%	18.2%	26.2%
SSG Buy Under	n/a	n/a	$321.30
RV/PRV (outliers out)		n/a	37.8/33.8 (2 yrs out)
RV/PRV (no outs)	33.0/30.0	n/a	29.6/26.4
Quality	n/a	n/a	Not Rated
PTPM – 5 yr ave	32.0% trend up	32.0% trend up	same
ROE – 5 yr ave End Equity	17.6% trend up	17.6% trend up	same
ROE – 5 yr ave Start Equity	n/a	n/a	38.1 trend down
Debt to Equity – 5 yr ave	n/a	n/a	-0- trend even

 

(1) Ann’s 10.2% estimated EPS growth came from her Preferred Procedure which involves making four estimates for the 5 next years.  Hers were: Sales @ 15.00%, PTPM @ 32.0% (5 yr historical ave), Tax @ 33.0% (VL’s estimate), & Shares @ 350M (VL’s estimate) = 10.2% EPS.

 

Ann’s starting point of 15% Sales growth is low.  Here’s why: (A) As to be expected, historical growth is trending down at GOOG, but it is still very high and well above Ann’s estimates: for the last 3 years, growth was 73.2% Sales & 90.1% EPS; last 2 yrs was 64.4% Sales & 58.9% EPS, and last year was 56.5% Sales & 34.1% EPS.  (B) In addition, GOOG’s Sustainable Growth Rate is 34.3%, the rate it could grow without borrowing, and Zacks currently is estimating growth for the next 5 years at 67.08% Sales and 28.13% EPS.

 

(C) Value Line does not make an explicit estimate of long-term Sales growth, but does estimate Sales per share at 22.0%.  Moreover, two Sales growth rates also can be implied from VL data: 24.78% (VL’s method) and 26.13% (traditional method).

 

(D) All these growth rates indicate that Ann started low by estimating 15.00% future Sales growth and ended low by estimating 10.2% EPS growth.

 

(2) Still another grounds on which to evaluate Anne’s SSG is what the analysts are estimating.  When I updated my SSG on 11-21, the six analysts I checked were estimating long-term EPS growth at an average of 22.5% with S&P low at 18.70% and Zacks high at 28.13%.  FactSet CallStreet via CNN Money was 19.00%, First Call via Yahoo Finance was 20.78%, VL was 23.00%, and Reuters via Morningstar was 25.2%.

 

FactSet’s 19.00% estimate was from 10 analysts who ranged from a high of 50.0% to a low of 14.0%.

 

(3) In a down market, I think it is appropriate for our Forecast High Prices to be close to the low end of Value Line’s estimated High Price.  Ann’s was 18% or $140 per share lower than the low end of VL’s estimate which is not close and which is one reason why she did not get a SSG Buy while I did. 

 (4) However, I have no confidence in my SSG as many of my judgments are blind guesses, especially the Forecast Low Price where I used 60% its 52 week low.  I know of no guidance that tells me if that guess is good or bad.

 

How low it will go in this recessionary period is anybody’s guess???

 

- Armin