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Fastenal: Frugal And Profitable

|About: Fastenal Company (FAST)

Summary

Fastenal's rock-solid business model has generated strong double-digit growth for the business with $9,000 invested on the IPO worth nearly $5 million today.

Fastenal maintains a conservative financial position, financing its growth internally without the need for long-term debt.

Fastenal has built a reputation as one of the most frugal companies in America, resulting in high profitability for the business.

Fastenal (NASDAQ:FAST) sells different types of industrial and construction supplies in the following product categories: threaded fasteners; tools; metal cutting tool blades; fluid transfer components for hydraulic and pneumatic power; material handling; storage and packaging products; janitorial, chemical and paint products; electrical supplies; welding supplies; safety supplies; metals, alloys and materials; and office supplies.

DOUBLE-DIGIT GROWTH
Fastenal started as a partnership among five friends in 1967 with the idea of pre-packaging automotive fasteners to be sold in vending machines. With a poor response to the vending concept, the company instead opened a single store in Winona, Minnesota to sell its fasteners. From this single store, the company has grown rapidly with nearly 2,700 stores now selling a variety of industrial and construction supplies in all 50 states and more than 20 countries.

Fastenal developed a blueprint for what proved to be a rock-solid business model: open stores as close to customers as possible in underserved industrial markets, staff them with great people and let them grow the business by exceeding customers' expectations for service while capturing market share. Profits generated were then used to fund additional store expansion.

This successful formula has generated strong double-digit growth over the years for the company with sales growing at a 15% annual rate over the last five years and net income and EPS compounding at 25% rates. The formula has also been successful for investors with 1,000 shares of Fastenal stock purchased in the 1987 IPO for $9,000, having split seven times, now equal to 96,000 shares worth nearly $5 million (plus cumulative dividends of roughly $500,000).

The company has come full circle with its vending concept given strong customer response today for its FAST Solutions (industrial vending machines) which increased 32% to 42,153 devices in the first quarter of 2014. Sales from industrial vending machines now account for 12% of total sales and continue to grow strongly, thanks to new technology.

Sale trends improved during the first quarter of 2014 as the weather improved, with March average daily sales up 11.6%. April sales rose 10%. Given the strong growth in March and April, management is hopeful that double-digit growth in overall sales may resume in the second quarter. Management expects gross profit to range from 51%-53% of sales for the full 2014 year, in line with its long-term goal.

DEBT-FREE BALANCE SHEET
Throughout its history, Fastenal has maintained a conservative financial position by financing its growth internally without the need for long-term debt. The company ended the first quarter with a strong balance sheet with no long-term debt and more than $89 million in cash. During the first quarter, the company paid $74 million in dividends and repurchased 200,000 shares at an average price of about $44.24 per share, with the authority to repurchase up to an additional 1.4 million shares. Management, proven to be excellent capital allocators, returns excess cash to shareholders through special dividends along with a steadily growing regular dividend.

FRUGAL AND PROFITABLE
Over the years, Fastenal has built a reputation as one of the most frugal companies in America. Bob Kierlin, one of the company's recently retired founders, instilled a no-frills sensibility into the company culture with the company's ongoing mission to slash non-essential costs at every level of the company. This has resulted in high profitability for Fastenal with return on shareholders' equity averaging a superb 22% over the last decade. With the marketplace in North America for industrial supplies estimated to be in excess of $160 billion, Fastenal is well positioned for future solid growth.

Long-term investors should fasten Fastenal into their portfolio. Fastenal is a HI-quality company generating double-digit and highly profitable growth with a frugal management team and debt-free balance sheet. Buy.

Disclosure: The author is long FAST. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.