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