FAST- Fastenal

[kirkomi]

I read some of the shareholder letters starting 2004. They do go into the details of their cost cutting and running a tight ship.

 

What I am wondering though is if this explains such fabulous results ? They have RoIC ~ 25% for a long time now and they have NO long term debt ! The gross margin is ~ 50% and the net margin is ~ 13% ! If this was is China, I would have classified it as a fraud and moved on. But, then they Ruane, Cuniff people own ~ 8% ...

 

Would only cost management get you here (I think not). With Transdigm I understand the competitive advantage ... I fail to understand it here. I really can't explain these results. Anyone care to shine some light here ?

 

[KCLarkin]

The Morningstar report describes their moat:

 

An industrial distributor builds a network effect by being ubiquitous in its customers’ and suppliers’ sales and procurement. We believe there are several strategies a distributor can pursue:  supply chain services, value-additive information, and multichannel distribution (phone, store, and online sales). We believe Fastenal has done an excellent job in most of these categories. Fastenal’s first strategy is to become a key link between 3,000 suppliers and 400,000 customers. For example, Fastenal ships most orders in less than 24 hours, and 80% of deliveries occur before 8 a.m. Additionally, Fastenal provides vendor-managed inventory where it systematically monitors a customers’ nuts, bolts, and supplies consumption and refills supply cabinets before stock runs out. The second strategy revolves around Fastenal’s extensive fastener knowledge base. If a nut or bolt becomes detached from a machine, Fastenal’s personnel are not only trained to provide a replacement based on its size, they can discuss the replacement fastener’s strength, alloy composition, fastener coatings for the application, and whether it meets certain industry or regulatory requirements. The product’s manufacturer does not have the time or resources to cost-effectively provide this information to a dispersed and inconsistent customer base. Lastly, Fastenal has 2,300 stores in the U.S., which makes it convenient for customers to easily purchase products and access salesperson expertise.

 

We believe a distributor’s cost advantages have four sources: volume rebates, direct product sourcing, private-label products, and an efficient logistics supply chain. As the largest fastener distributor, Fastenal has historically garnered volume-based rebates from suppliers. For the past several years, Fastenal has also increased its direct sourcing from non-U.S. manufacturers and wholesalers, constantly looking for component manufacturers that offer the best value. Over the past three years, private-label sales have grown to 10% from 6% of total sales and a 20%-40% improvement in gross margins (depending on the product). Lastly, Fastenal significantly insourced its domestic supply chain to create a cost advantage. Management believes its distribution center automation and insourcing most truck transportation has provided 100 basis points of gross margin expansion in the past five years. Approximately 95% of Fastenal’s trucking needs are insourced, which is far greater than any other major peer.

FAST-Morningstar.pdf

[Liberty]

http://basehitinvesting.com/thoughts-on-fastenal/

[kab60]

Thanks, Liberty - this article from the blog is a really good read; http://www.inc.com/magazine/19971001/1336.html (The Cheapest CEO)

[fareastwarriors]

Thanks, Liberty - this article from the blog is a really good read; http://www.inc.com/magazine/19971001/1336.html (The Cheapest CEO)

 

That was a fun and interesting read. Thanks for sharing.

[Phaceliacapital]

Did you find some indication of the economics of their industrial vending machines?

[sleepydragon]

an hour long speech given by the CFO (now CEO) in 2013:

 

best part starting at 17:57 :)

[elevensecsrt4]

VP of sales sold 10k shares

 

http://www.insidertradingreport.org/fastenal-co-fast-files-form-4-insider-selling-kenneth-r-nance-sells-10000-shares/6158882/

 

Just noticed it was excerising of options granted

[AzCactus]

I would imagine that this company has been beat up due to the slowdown.  But the company also seems to have a good balance sheet, strong market position and good leadership team.  Anyone else have insights, thoughts concerns etc.

[kab60]

It's a fabolous business and distributors are nice in that they're countercyclical, so in a downturn they release inventory and generate strong FCF. But it hasn't actually been left for dead which implies everyone knows the above - it has always traded at a pretty heavy valuation. MSC Industial Direct is much cheaper but also a worse business with worse management.

[KCLarkin]

MSC Industial Direct is much cheaper but also a worse business with worse management.

 

To be fair, MSC is a good business with good management.So the question is, do you want a great company at a good price. Or a good company at a great price.

[AzCactus]

To be fair, MSC is a good business with good management.So the question is, do you want a great company at a good price. Or a good company at a great price.

 

I think if I am harnessing my inner Buffett the answer is obviously the former.  Those seems to be the ones that do best over a longer period of time.  I mentioned in another thread but also think this is something that Berkshire may look to acquire.  Other than it not being super cheap (which I get is important), it does check the other boxes.  Also, as Buffett himself has said some companies are worth paying up for. 

 

[coc]

Fastenal is very well run. I don't think anyone doesn't know that. But it's been growing at 6-7%/year and trades for 25x earnings in the middle of a pandemic, which is a hard swallow for most. Sort of like Costco, which is even pricier.

 

It's not a bad way to earn 9-10%/year in a great business though.