BERKO: Fastenal well-run, but overpriced
Friday, September 21, 2012 7:00 AM
Dear Mr. Berko:
I bought 200 shares of Fastenal at $44 in 2010 and now have 400 shares after it split 2-for-1 the following year. Fastenal ran up to $55 this year, but I didn’t think to sell it until after it fell all the way back to $40. It’s now $45, and sometimes I think it can tumble again as it did during the first quarter of this year. My broker thinks I should sell 200 shares, which would return my original investment and make good sense to me. Then he wants me to buy 300 shares of Microsoft. I would appreciate your input.
B.T., Waterloo, Iowa
Fastenal Co. (FAST-$43.60), founded in 1967 and located in the bucolic island city of Winona, Minn., looks like one of the most unexciting, colorless, odorless, boring public companies quoted on the ticker tape since Thomson McKinnon Securities took Hackney Fence public in 1969 at $9 a share. I believe one can tell a book by its cover, but in this instance, FAST’s sterile cover is delightfully deceiving. FAST peddles almost a million different units of some of earth’s most dull, unimaginative and prosaic products, such as pins, files, plumbing valves, grease fittings, flanges, slings, hooks, flashlights, gloves, gaskets and bearings. These products should produce more than $3 billion in 2012 revenues. Its 2,700 stores, mostly in small and midsize markets in the U.S., also sell power, welding and cutting tools, safety and electrical supplies, abrasives, adhesives, janitorial products, and accessories for hydraulics, pneumatics, heating, ventilation and air conditioning. Big yawn! These stores, staffed by 10,000 knowledgeable employees, are local one-stop sources for a spectrum of maintenance and construction supplies. And the company’s mantra is, “Because it’s on our local shelves, it doesn’t have to be on theirs.”
Meanwhile, the purchase of 100 shares of this very quiet industrial and construction supply company at $30 in 2001 – segued into 400 shares with the help of two 2-for-1 splits – is worth $18,000 today. And over the past 20 years (except 2001 and 2009, when the U.S. economy was miserable), FAST has increased its profits each year, aided by an oak-and-rock balance sheet and a strong, dedicated management team.
CEO Will Oberton, who has been with the company since 1980 and held the top job since 2002, really knows how to run this company and manage its people. In fact, everyone in Oberton’s upper-management team has been with FAST for more than 20 years. Since Oberton took the corner office, both operating margins and net profit margins have increased 50 percent, to 22 percent and 13.8 percent, respectively, and the number of retail locations has more than doubled. Some believe that Oberton will begin to slow store growth in the coming few years and concentrate efforts on growing existing store revenues. FAST has more than $240 million as a result of its annually increasing cash flow.
I admire the company and its management, but I’m concerned about the stock’s nosebleeding price-earnings ratio of 32, especially in this tenuous market. But this high number doesn’t seem to bother T. Rowe Price, BlackRock, JPMorgan Chase, Vanguard or Morgan Stanley, some of FAST’s major shareholders. Even though 2013 earnings are expected to come in at $1.70 per share – versus 2012’s $1.40 – I recommend selling all your shares. Let someone else take the risk of owning a company that trades at 32 times earnings in an economy that could fall back into a recession.
Finally, Microsoft Corp. (MSFT-$31.17) doesn’t flip my flapjacks, even though this cash machine continues to rake in more money than most sovereign nations. The shares seem to get stuck at the $30-$33 level and appear reluctant to trade higher. And with more than 8.5 billion shares outstanding, it’s kind of off-putting that a 2-point increase in share price can change MSFT’s capitalization by $17 billion, more than enough money to erase the 2012 California state deficit. MSFT is too big to fail and may be too big to grow its stock price. Holding cash gives you time to think.