12/14/2010
HEADLINES
Fastenal Stores Approaching ‘Saturation’ Point
Amid signs of recovery, Fastenal has come under some scrutiny from investment analysts concerned about the Winona, MN-based supplier’s long-term growth prospects.
Fastenal expects to reach its store saturation point by 2014, though some analysts think that estimate is optimistic.
“With nearly half the Fastenal stores within 10 miles of another Fastenal store, (its store saturation point) could come sooner than that,” writes Doug Kass of The Street.
Fastenal’s store growth rate has slowed from a 13%-15% gain during the first half of the decade to a 7%-8% rate of increase in 2010. Fastenal’s rate of store openings increased 1.9% to 2,453 locations at the end of September.
A chink in Fastenal’s armor appeared in August, when shares fell by $3 a share amid reports that earnings only modestly ($0.01) exceeded expectations.
Skepticism over Fastenal’s premium valuation has also surfaced in recent weeks, as insiders — including Fastenal Chairman Robert Kierlin — have begun selling large chunks of stock (as many as 450,000 shares in the last six months).
“After trading with a P/E at 18x in late 2008/early 2009, Fastenal’s multiple has returned to its average over the past five to six years (25x),” Kass writes. “If a lower-than-historical EPS growth rate becomes more evident, Fastenal’s ‘cult’ status (reflected in its 50%-plus premium valuation to peers) is likely to be in jeopardy, especially since the share base is dominated by institutions (85%).”
Likewise, Fastenal’s unprecedented drop in sales during the most recent recession — from $2.35 billion to $1.95 billion — “underscores the company’s maturation and increased vulnerability to the business cycle.”
And October sales were lackluster, falling 1.5% sequentially from September.
To be sure, Fastenal has posted seemingly impressive sales gains in 2010. Third-quarter sales rose 23.4% to $603.7 million and Q3 net earnings jumped 57.6% to $75 million.
Likewise, nine-month sales improved 16.7% to $1.69 billion, while net earnings increased 43.2% to $200.2 million.
But those percentage gains are in relation to the sharp sales and earnings drop the company experienced in 2009. Going forward, the path to growth gets steeper, as new figures are compared to the company’s higher current results.
None of this points to anything close to Fastenal’s demise, however. Analysts are quick to note that the company continues to deliver reliable returns to investors.
Fastenal is also a fiscally conservative company with no debt and $200 million in cash.
But investors seem to be awakening to the prospect that Fastenal’s growth has a ceiling that is perhaps approaching sooner than they’d like. ©2010 GlobalFastenerNews.com
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