Fastenal: Time To Buy

|
About: Fastenal Company (FAST)
by: ChartMasterPro
Summary

The Momentum Growth Quotient for the company is 10.93, which is 19.90% higher than the average for the S&P 100.

Shares present a forward rate of return of 9.97% at the current price.

ChartMasterPro upward target price of $32.00.

Shares of Fastenal Company (FAST) are down 16.90% since peaking on April 26, 2019, and in my opinion, the shares of this wholesale supplier of industrial and construction supplies are an attractive buy at current price levels. The company has a strong history of generating earnings growth, and the future growth ratios point to continued growth over the next 12 months. I lay out my bullish argument for the company below by reviewing some pertinent fundamental and technical aspects of the stock.

Momentum Growth Quotient

My Momentum Growth Quotient (MGQ) plays a critical part when it comes to determining if I'm going to go long or short a stock. Generally, I only want to go long a stock with an MGQ higher than that of the S&P 100, and I want to go short a stock with an MGQ lower than that of the index (for a more detailed explanation of how I calculate the MGQ, please see my blog post).

As of the end of July 2019, the MGQ for the S&P 100 was 9.07.

The current MGQ for FAST stands at 10.93, which implies a 19.90% higher growth rate compared to the S&P 100. This tells us that FAST has strong future growth potential and is a good candidate for a long position.

Financial Snapshot

Let's dig a little deeper into the financial data to get a better feel for how the company has performed on certain fundamental metrics and what these numbers imply for future growth.

Caveat Lector: I am a Quant Trader - that is, I seek to understand market behavior by using mathematical and statistical modeling, measurement, and research. So, you won't find much qualitative analysis in my work or in my trading process. The goal is to identify optimum entry points for trades based on my quantitative model and execute those trades as effectively as possible.

The Past

During the past 12 months, the average EBITDA per share growth rate of Fastenal was 10.40% per year. During the past three years, the average EBITDA per share growth rate was 8.10% per year. During the past five years, the average EBITDA per share growth rate was 7.90% per year. During the past 10 years, the average EBITDA per share growth rate was 11.40% per year (GuruFocus).

The Future

Knowing how a company has performed in the past is important in order to evaluate management's past record in running the business. But more important to us is how profitable the company will be in the future because we are investing going forward, not backward. And it's the forward-looking metrics that should really get you excited about FAST.

I like to use two measuring sticks to gauge the future growth potential for companies: Forward P/E and forward rate of return.

I prefer to use the forward P/E ratio (current stock's price over its "expected" earnings per share) rather than historical P/E to gauge a company's expected future earnings power. A high forward P/E ratio means that investors are anticipating higher growth in the future and are willing to pay more for future earnings - momentum investing is all about following the trend (perceived or real).

FAST has a forward P/E of 22.19 compared to a 16.99 forward P/E for the S&P 100. The forward P/E for FAST is greater to that of the index, suggesting that the markets are expecting a market growth rate for the company greater than that of the broader markets.

The forward rate of return for a stock (created by Donald Yacktman) is one of my favorite quotients for gauging the market's expectation for future growth for a company. Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. In simple terms, the forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.

The forward rate of return for FAST stands at 9.97%. This implies that an investor buying the stock today should expect a 14.39% return over the next 12 months. The average forward rate of return for the S&P 100 as of the end of December was at 7.90%, so FAST has an implied potential rate of return that's 1.26x greater than that of the index.

The risk inherent in the forward rate of return is that the calculation is reliable only if the company can grow at the same rate in the future as it did in the past. If the growth rate falters, the projected returns will not materialize. But we are willing to accept this risk as part of the difficult process of forecasting earnings and growth momentum.

Technical Snapshot

As per my ChartMasterPro Daily Trading Model, there's a high probability of a rally to the $32.00 level from here, which would equate to a gain of around 7% for the shares:

  1. The shares have found strong buying support at the $29.00 support level, which dates back to January 2019.
  2. The shares are on the verge of breaking above their 9-day moving average - which often signals a short-term bullish burst in the share price
  3. The MACD convergence lines are still bearish, but are now moving higher and look to break bullish soon.
  4. There's a high probability, from a technical perspective, of a move back up the $32.00 level from here.

I will buy FAST call options over the next few days.

For investors in the shares, I recommend that you hold for three months or $32.00 whichever comes first. For longer-term investors, I believe FAST is a solid addition to any growth portfolio over the next 12 months.

Relative Strength

When looking for companies to invest in, I like to find management teams that have outperformed their peers in the same industry with regard to growing earnings, running the company efficiently and generating higher-than-average returns for shareholders.

Management Effectiveness

FAST Industry
Gross Margin TTM 47.59% 35.39%
Operating Profit Margin TTM 19.80% 17.17%
Net Profit Margin TTM 14.52% 13.62%

Return on Equity - TTM

31.85% 11.47%

Source: Reuters

This is a company that's posting higher profit margins than its peers, with a management team that's very good turning revenue into earnings, and generating higher returns on equity than its competitors. The price drop in the shares over the last three months presents an excellent opportunity to initiate a position in FAST.

Price Disconnect

The chart below shows the company's net operating profit after tax on a TTM basis - you can see that although NOPAT has been trending higher at a healthy pace through 2019, the share price has collapsed over the last three months. With the company's long history of being able to convert rising revenue into earnings in an efficient manner, this significant drop in the share price is an excellent opportunity to pick up these shares on the cheap - I view the recent drop in the share price as an overreaction to the downside given the company's strong future-looking growth ratios.

Chart Data by YCharts

Conclusion

When I go long a stock, I want to invest in a company that provides superior future growth potential, but I also want to time the entry into any position to try to maximize my return.

So, I use fundamental analysis to identify shares with a strong future growth rate, and then I apply technical analysis to identify ideal entry points.

In my opinion, FAST is a strong buy at these levels from both a fundamental and technical perspective.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FAST over 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.