Solid And Consistent Performer
When we look at the financial performance of Fastenal (NASDAQ:FAST), we can't help but conclude that it is a solid company. Over the last 20 years, Fastenal has registered positive profit growth in all years except for extreme periods, namely the dot.com bubble burst and the global financial crisis. (Please see the Price to Earnings Ratio chart below.) As in any business that is exposed to the industrial cycle, Fastenal is exposed to the risk of an industrial slowdown, which affects demand from its industrial customers.
The company is a stable dividend payer, having paid dividends every single year since 1991. It is prudent in growing its business primarily with internally-generated cash and the number of shares through the years have not increased.
One of its secrets to its ability to grow its business steadily through the years is its provision of products and services through multiple channels. These include their 2,383 branches, 605 onsite locations ("branch" within customers' facilities), and 71,000 vending machines.
Despite the company offering common industrial products, its margins are commendable. Net profit margins are around 13% and this has even improved from 10 years ago. We believe the company's efforts beyond just selling products has something to do with these healthy margins. And there is potential for margins to improve even further in the next few years. As the company continues to grow its revenue, it expects to reap the benefits of economies of scale.
Fastenal helps its customers to unlock productivity and profits through close collaboration between the company's dedicated team and its customers. These value-added services may include a site evaluation within the customer's facility to gain a deeper understanding of its operations in order to uncover waste and improve efficiency. Furthermore, it does not just offer standard products; it is able to customize its products to solve customers' problems.
Source: Home Page - ProThinker
The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used, e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or net profit after tax may be volatile and it is better to use earnings before interest and tax (EBIT) to value the company. We use the PE band or market cap/EBIT band to show whether a stock is overvalued or undervalued based on its historical valuation.
At the price of USD53.02 as at 14 June 2018, Fastenal is trading at a PE Ratio of 23.5 times last 12 months earnings. This is a 16.7% discount to its historical average price to earnings ratio of 28.2 times. (Price based on the historical average PE of the company is indicated by the red line.)
The price to sales ratio is another commonly used valuation indicator for a stock. It overcomes some of the limitations of the price earnings ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits.
At the price of USD53.02 as at 14 June 2018, Fastenal is trading at a price to sales ratio of 3.3 times last 12 months sales. This is a 5.0% discount to its historical average price to sales ratio of 3.5 times.
Price to cash flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as price to earnings and price to sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the price to cash flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock. At the price of USD53.02 as at 14 June 2018, Fastenal is trading at a price to cash flow ratio of 22.8 times last 12 months cash flow. This is a 16.0% discount to its historical average price to cash flow ratio of 27.2 times.
Price to earnings, price to sales, and price to cash flow ratios all value a company based on what it is generating (i.e. profits, sales, or cash flow). Price to book ratio is different in that it values a company based on what it owns (i.e. its net assets). At the price of USD53.02 as at 14 June 2018, Fastenal is trading at a price to book ratio of 6.8 times current book value. This is a 1% discount to its historical average price to book ratio of 6.9 times.
For stocks that have a history of paying meaningful dividends, the stock price is often dependent on how much dividend the company pays. At the price of USD53.02 as at 14 June 2018, Fastenal is trading at a dividend yield of 2.7%. This is a 34.2% discount to its historical average dividend yield of 2.0%. (Note: The lower/higher the dividend yield, the more expensive/cheaper the stock is.)
The composite valuation indicator is derived using our proprietary method to put all the valuation indicators in a way that explains the stock price best. It recognizes that looking at a single indicator is dangerous and inadequate. It also overcomes the difficulty of different indicators pointing to giving different signals and difficult to act upon if you do not have a composite valuation. Our composite valuation indicator does not assume that valuation stays constant at the average level. If the growth of the company slows down, it will adjust the valuation downwards to reflect the slower growth. Based on the composite valuation indicator, the stock has a target price of USD65.52 within a 12-month period. Our target price represents upside of 23.6% based on stock price of USD53.02 as at 14 June 2018. This upside potential comes from a combination of an increase in valuation from the slight discount as measured by the various valuation indicators and a growth in the business. To be conservative, we recommend taking profit in the 18% to 20% range.
Of course, in deciding whether or not a stock is attractive, we need to consider other aspects of the stock such as earnings quality, financial condition, operational excellence, cash flow, technicals, etc.
It is difficult to find a stock that is attractively valued and still pass every single criterion of the investor with flying colors. At times, we need to make certain trade-offs.
For a full quantitative analysis, you could refer to this report.
We believe that Fastenal is a well-run company that has proven itself to be a solid and consistent performer. It differentiates itself from being a mere supplier of industrial products to one that actually adds value to customers' business and helps them increase productivity and reduce costs.
The stock also looks attractive on a valuation basis using a thorough valuation methodology that combines five valuation indicators in an optimal way to best explain the stock price.
Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.