Second Quarter Results
Fastenal reported a decent set of financial results for the second quarter. The company reported a 14.7% increase in net sales to $805 million. Pre-tax earnings rose 19.2% to $179 million as operating margins increased by 80 basis points to 22.2%. Net income rose by 19.3% to $112.3 million, or $0.38 per share. Last year the company reported earnings per share of $0.32.
In the first six months of 2012 the company opened 53 new stores, bringing the total to 2,635 stores. The company did operate 13,036 vending machines for industrial tools, and it installed an astonishing 5,583 new machines in the first six months of this year. The company anticipates that its vending machines can offer superior customer service, in its goal to supply simple tools to its industrial clients.
June's monthly sales growth rate of 14.0% came in as a relief to many investors, as it implicates a small pick-up from May's 13.1% growth rate.
Despite the aggressive growth of the company, mainly driven by installment of its vending machines, the financial position of the company remains rock solid. Cash, equivalents and marketable securities came in at $213 million by the end of the second quarter, while the company operates without any meaningful debt.
For the first six months of 2012 the company reported earnings of $0.72 per share, compared to $0.59 last year on revenues of $1.57 billion. At this rate the company is on track to earn $1.50 per share on annual revenues of around $3.2 billion. After today's 6% jump in the share price the company is valued around 4 times annual revenues and 28 times 2012's annual expected earnings. This values Fastenal at a premium to its competitors W.W. Grainger (GWW) which trades at roughly 1.5 times annual revenues and MSC Industrial Direct (MSM), trading at 1.9 times annual revenues. These competitors trade at 20 and 16 times earnings, respectively.
Fastenal is a typical growth stock operating in a matured industrial industry. As the company's valuation is based on high growth assumptions, Fastenal has seen a meaningful correction in the first half of 2012 when investors shunned risky assets amidst signs of an economic slowdown. After peaking at $55 per share in March of this year, shares have fallen to $42 at the moment, the similar level as the first of January.
On a longer term an investment in Fastenal would have been an outright success. Shares doubled over the last five years and more than tripled over the last decade. Today's jump of 6% is driven by relief of investors regarding the June's sales figures which showed a surprise increase in growth versus the month of May. In the long term, the valuation is driven by the monetization rate and the success of its vending machines. Although the stock is not priced for perfection, there is room for disappointment if the economic slowdown continues.