It may seem borderline insane and irresponsible for any analyst to make a buy recommendation in the current environment, which is brutal by any historical comparison.
But I put it to you that it is more insane and irresponsible to make a buy recommendation when the
is trading at 14,000 than it is when in the low 9,000s.
, the largest U.S. distributor of fasteners, is a beacon of light in a barren corporate landscape where CEOs and management teams have failed investors repeatedly. Fastenal, founded in Winona, Minn., is the way U.S. corporations should be run.
Our model gives Fastenal an "A" rating, which corresponds to a "Buy." I must stress, however, that I am only suggesting that investors keep this stock in mind until they think a bottom in the market is achieved or the company's price falls to levels that represent a good entry point to execute a long-term buy-and-hold strategy.
Fastenal has a very strong balance sheet, as evidenced by its incredibly low leverage ratio, where total liabilities as a percentage of total assets is only 13%. This company has used only 13 cents of liabilities (which includes debt) to fund every dollar of assets totaling $1.16 billion. Debt in this environment is a clear risk factor, and Fastenal has very little of it.
The most outstanding aspect is that Fastenal's management team has virtually funded all of its assets through profit retention. Eighty-five cents of every dollar of assets is funded by retained profits; i.e., profit it has earned and kept. This means it has effectively raised 2 cents per dollar of assets from the equity markets and 13 cents from the credit markets.
In other words, the company is funding itself. It doesn't need the credit or equity markets to fund its operations. This is unheard of in a modern context. Fastenal doesn't need a government bailout to free up the credit markets so it can borrow to continue to operate -- it virtually feeds itself.
The funding from profit retention combined with minimal debt has seen Fastenal's book value compound at roughly 16% to 18% annually over the past 10 years. This, again, is out of the ordinary and rarely seen. If more evidence is needed, the company's return on equity has averaged 22% over the past 15 years, despite its large equity base, which mathematically reduces its ROE figure. If the company financed itself with more debt, ROE would be much higher.
The company conducts its business under various trademarks and service marks, and its product lines consist of two categories: threaded fasteners, such as bolts, nuts, screws, studs and related washers; and miscellaneous supplies, such as paints, various pins and machinery keys, concrete anchors, batteries, sealants, metal framing systems, wire rope, struts, private-label stud anchors, rivets and related accessories. Threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures.
While the company's exposure to the building and construction markets is a key negative at this stage, Fastenal's product line is essentially nuts and bolts -- things that are always going to be needed whether the economy is in bust or boom mode. They are not big-ticket items that require a significant outlay of cash by any means, and maintenance projects are still going to be conducted in a bad economy.
The stock currently trades at around $37 and has fallen from its 52-week high of $55. However, I would like to see it trade in the $20-to-$27 range before I would take a long-term buy-and-hold. I base these calculations on various valuation metrics such as P/E and P/B, which are currently at 23 and 4.95, respectively.
I have assumed various scenarios and made adjustments to earnings per share, currently at $1.76, to account for a slowdown in the company's business to arrive at the above-value range. Further, I have used a basic discounted cash flow analysis technique and inputted the various scenarios to generate a rough valuation of the company. (Valuation is not an exact science.)
Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
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