Fastenel Co. (FAST)

Not so FAST (Aug 10th 2016)

Thesis: With a base-case valuation of $33, the last traded price of $42.6 indicates a SELL. FAST is a stellar business and will conceivably continue to generate value as it grows for the next 5-7 years – but is overvalued at present. Given FAST’s narrow-moat, we recommend waiting for a significant mispricing event and consider buying the stock at $30.

What does it do?

FAST is among the largest industrial distributors in North America. It takes pride in a large number of SKUs, its efficient supply chain, cost management and highly-trained personnel. FAST customers are businesses that expect to make frequent, predictable orders of industrial products intended for OEM and MRO.

How has it done so far?

FAST has been an exemplary value-creator for its owners. Its median ROIC and ROE have ranged in the mid-20%. Its WACC has ranged from 7-8% leading to a wide ‘ROIC- WACC’ spread. In addition, FAST has shown a superior re- investment dynamic, re-investing ~40% of NOPAT back into the business, while maintaining the same ‘ROIC minus WACC’ spread.

Over the past 10-years, for each $1 in equity, FAST has created an additional $4 in Economic-Value, equivalent to 17% CAGR in value creation. 75% of the value was returned as cash to shareholders, mostly as dividends and some as share buybacks. The remaining 25% was retained to increase shareholder’s equity.

Does it stand out?

Among the thousands of industrial distributors in America, FAST is a first-rate player. It holds clear advantages (buying power through scale, impose high Switch cost on customers, broad product-offering, a brand built on trust, expertise, ability to extend credit) over the many small- sized distributors spread all across the country. When compared to similar-sized comps, however, it falls short in possessing a formidable economic moat. Another noteworthy threat, though not immediate, are online distributors.

What does the future have in store?

The Construction and Manufacturing markets in the U.S. are mature – meaning that the industry pies are likely to grow at a slow pace if at all. Recent reports indicate that Construction and Manufacturing in the United States will continue to thrive in the long-run, but will also experience technological disruptions that are unusual for such slow- evolving industries. FAST is well-placed to supply the fasteners, hammers and safety equipment that will continue to be essential. Though it has many small-sized competitors, it is difficult for most to grow to the large scale that FAST enjoys, simply because growth means stealing market share as a result of a stagnant industry pie.

Valuation

Price-Implied market expectations of revenue growth are clearly unachievable. Anticipated revisions yield an intrinsic value range of $23 – $39.

FAST is an outstanding business and has consistently returned cash to its owners – mostly in the form of dividends. When the 2015 oil price dip and currency fluctuations revert to mean, FAST is likely to enjoy its previous rate of growth and 21% EBIT margin for another 5 years. Beyond that, we assume that FAST’s business is likely to be encroached by online retailers and fellow industry incumbents of a similar size.

FAST’s valuation with the above assumptions indicates that it is overvalued today.

Click here for the appendices and other research docs

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