Pat McKeough recently replied to a member of his Inner Circle asking for an opinion on Fastenal Company. The distributor of industrial tools and supplies was able to increase its dividend despite slowing sales to the oil and gas sector.
Q: Hi Pat: I would be interested in your opinion on Fastenal (symbol FAST on Nasdaq).
A: FASTENAL COMPANY (symbol FAST on Nasdaq; www.fastenal.com) is a leading wholesale distributor of industrial and construction supplies. It has 2,630 wholesale and retail stores in the U.S., Canada, Mexico, Central America, Asia, Europe and South Africa. The company also owns 14 distribution centres—in the U.S. (11), Canada (2) and Mexico (1).
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Fastenal sells: threaded fasteners; tools and equipment; abrasives and cutting tools; components and accessories for hydraulics, pneumatics, plumbing and HVAC (heating, ventilation and air conditioning); material-handling products; and janitorial, welding, safety and electrical supplies.
The company serves clients in the construction and manufacturing markets. Its construction customers include general, electrical, plumbing, sheet-metal and road contractors. In manufacturing, Fastenal sells its products to original equipment manufacturers and maintenance/repair operations. It also serves farmers, truckers, railroads, mining companies, governments, schools and certain retail trades.
In recent years, Fastenal started selling its industrial products through vending machines that operate 24 hours a day, 7 days a week.
Revenue rose 39.8%, from $2.8 billion in 2011 to $3.9 billion in 2015. Part of the company’s growth is due to its purchase of related businesses. For example, in 2015 it paid $23.5 million for certain assets of Fasteners Inc. This firm distributes industrial and construction equipment in Washington, Idaho, Oregon and Montana.
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Fastenal’s earnings jumped 43.4%, from $357.9 million in 2011 to $513.3 million in 2015. Due to fewer shares outstanding, earnings per share gained 46.3%, from $1.21 to $1.77.
In the three months ended March 31, 2016, sales for the company rose 3.5%, to $986.7 million from $953.3 million a year earlier. Earnings fell 1.1%, to $126.2 million from $127.6 million. However, per-share earnings rose 2.3%, to $0.44 from $0.43, on fewer shares outstanding.
Demand for Fastenal’s products has softened lately. That’s mainly because oil and gas producers are spending less on their operations until commodity prices improve. In addition, the company gets 11% of its sales from overseas markets and the higher U.S. dollar has weighed on its results.
Fastenal’s long-term debt of $362.4 million is a low 3% of its market cap. The company also holds cash of $150.6 million, or $0.52 a share. It recently raised its quarterly dividend by 7.1%, to $0.30 a share from $0.28. The new annual rate of $1.20 yields 2.6%.
The stock trades at 25.3 times the $1.82 a share that Fastenal will probably earn in 2016. The company benefits from being a niche supplier of industrial and construction products. That cuts its reliance on customers that operate in these cyclical industries. But it will need a sustained economic rebound to post higher sales and earnings.
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I’d be interested in a breakdown of sales from its stores versus those vending machines. If nothing else, it’s got a really unique business model.
Had my eye on this one for while. I may jump in on the next price dip.