Fastenal: Great Company Expensive Stock

| About: Fastenal Company (FAST)
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Fastenal (NASDAQ:FAST) provides supplies to construction and industrial customers through its network of over 2,600 stores. Fastenal operates a global business but the vast majority of its business is in the United States (90% of total revenues) with smaller operations in Canada and Mexico. The most popular product sold in Fastenal's stores is threaded fasteners which account for about 42% of total revenues. With nearly 500,000 different types of industrial/construction supplies Fastenal is a major supplier to manufacturing, maintenance, repair, and construction companies. Fastenal has a diversified customer base with no single customer representing a significant portion of total sales. In addition to its stores, Fastenal also operates vending machines (dispenses fasteners) and small stores (not counted in the store count) within major customers' manufacturing facilities to cater to the specific needs of these large customers.

In the future, Fastenal plans to eventually operate about 3,500 stores in the United States. For many years, Fastenal has grown its new store count at a 10% to 15% annual rate. However, in recent years, Fastenal has decided to reduce its new store annual growth rate to about 3%. The purpose of this reduction in new store growth is to free-up financial resources to expand its outside sales force to achieve better sales growth from its existing business as part of a strategy to boost profits.

We believe that this effort to reduce new store growth is a telling sign that Fastenal is beginning to saturate its markets and will soon see declines in its sales growth. Over the last decade, Fastenal grew earnings at a 19.0% compound annual growth rate but we believe that Fastenal's business has matured to the point that such high grow rates are unlikely in the future. Fastenal has enjoyed a high earnings multiple for many years due to its high earnings grow rate. However, we believe that a high earnings multiple is no longer justified as Fastenal's earnings will grow at a significantly slower rate in the future. Over the last decade, Fastenal has had a PE ratio range of around 23 on the low side and 36 on the high side. We think that Fastenal's current business and future prospects only justify a PE ratio of about 18. We see today's valuation of Fastenal shares as significantly overvalued and we would not buy or hold shares at the current price.

We believe that Fastenal is expensive for the following reasons:

  1. Fastenal is selling at an expensive forward earnings multiple of 29.7 times 2013 projected earnings.
  2. Fastenal has expensive valuation ratios with a TTM PE ratio of 33.2, PEG ratio of 1.71, a Price to Sales ratio of 4.63, and a Price to Book ratio of 8.95.
  3. 11 analysts cover the stock but only 3 have a Buy/Strong Buy rating on the stock.
  4. The average 12 month price target for Fastenal is $49.83/share. Compared to the current price of $48.07/share there seems to be little upside at the current price.

Disclaimer: We are investment advisors. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.