Fastenal: A Long-Term Winner Beyond The Magnificent Seven

Investors fixated on the solid performance of the seven magnificent technology stocks have probably missed Fastenal Company, a wholesaler and retailer of industrial and construction materials like screws, bolts and fasteners. Since it went public in 1987, Fastenal split its shares multiple times and has been a big winner — beating the S&P 500 and the Nasdaq Indexes by a wide margin.

Last week, the company reported adjusted earnings of 38 cents per share, beating the Zacks Consensus Estimate of 37 cents.

Net sales of $876.5 million are up 8.7% yearly, exceeding the Zacks Consensus Estimate of $870 million by a marginal 0.8%.

Michael Ashley Schulman, CFA, likes Fastenal's financials. "Fastenal is a sleeper of a stock that has outperformed many better-known technology names over the last five and 20 years," he told International Business Times. "It trades five times sales but has a lofty PE of 34. However, debt is low, and ROE is a very respectable 35.5. Cost discipline and solid execution drove slightly stronger-than-anticipated 4Q profitability due to a softening manufacturing environment with PMI below 50."

Fastenal's financial performance looks even better when it comes to economic value added (EVA), the difference between the return on invested capital (ROIC) and the weighted average cost of capital (WACC).

EVA is a measure of economic profit, which indicates how effectively its management allocates capital to different business opportunities and how strong its competitive advantage is.

According to Gurufocus.com, Fastenal has an ROIC of 30.45% and a WACC of 9.99%, which yields an EVA of 20.46%.

Most notably, Fastenal has maintained an EVA of around 20% over the last 10 years, meaning the company has kept its competitive edge.

A high EVA, in turn, has helped the company create plenty of free cash flow. For instance, for 2009-2023, Fastenal's cash flow soared from around 100 million annually to $750 million, which helped the company finance several dividend hikes and share buybacks, including 6,200,000 shares announced in 2022.

Fastenal has managed to maintain its competitive edge, thanks to multiple advantages that act as "moats" — to use Warren Buffett's terminology to protect its market from the entry of new competitors.

On top of the list of Fastenal's advantages is scale, the cost benefits arising from a growing size, like a decline per unit costs. Fastenal has 3,334+ store locations in the U.S. and Mexico, up from 2,600 a decade ago.

Next on the list is scope, the cost benefits associated with broadening the product offerings through the same channels, in this case, through its stores and the relations it has established with contractors. Fastenal sells hundreds of thousands of MRO, construction and OEM products that expand to 15 product lines.

The list of advantages continues with customization, the offering of customer-tailored solutions.

Still, there's bundling, the packaging of different product characteristics to produce unique customer value propositions and avoid commoditization.

And there's aggregation, the benefit of pulling many orders together to help customers cut their transaction costs.

Compounding the power of Fastenal's multiple advantages is the integration of its supply chain activities. The company owns manufacturing facilities, a transportation fleet, distribution centers, inventory supply systems and retail and sales service facilities.

In short, what makes a company a long-term winner isn't investor hype but company fundamentals. Most notably, the ability to raise barriers to entry into its markets.

"Fastenal's extensive scale, growing digital presence, branch and onsite business (at end-customer locations), supply solutions, NHL partnership and robust track record of successful execution have contributed to growth rates surpassing the market average," Schulman added.

Vijay Marolia, co-founder of Cash Square, agrees. "Starting with fundamentals, they have consistently delivered returns on equity and capital," he told IBT. "Even better, their margins are higher than peers, and their ability to grow cash flow from operations is amazing."

He thinks Fastenal's shares are out of favor due to unrealistic investor growth expectations. "Said differently, Wall Street is once again being short-sighted," he added.

Marolia cites a recent downgrade from CFRA as confirmation of the negative sentiment for the stock. "Institutions are buying shares, and customers continue to buy services," he said. "The long-term outlook seems promising. And while you wait, you can collect a solid dividend."

Still, Schulman is concerned about slowing down the company's growth. "One thing to observe is their Daily Sales Rate (DSR) Growth, which has been declining over the last nine quarters," he said.

Disclosure: The author owns shares of Fastenal.