Archive for the 'Analysis' Category

The 4 M’s of Fastenal: Management

Fastenal has several executives who have been with the company for quite some time and have been promoted from within. The Chairman of the Board, Robert Kierlin, is the founder of the company. This is all very positive for investors because having management with this type of history with the company lends itself to having their interests aligned with the shareholders interests.

Executive compensation for Fastenal management is actually lower than a lot of its competitors. The history has shown that Fastenal has always had one of the lowest CEO salaries for quite some time. In 2004, Kierlin’s bonus as CEO was dropped from $121,500 to $71,214 even though the stock price was up more than $17 from the start of 2003.

The one thing I couldn’t find when doing my research is what big-moat likes to call the “Big Audacious Goal” (BAG) of Fastenal. The CEO references their commitment to improve the customer’s experience but this is the goal of every company in this industry. To sustain the growth they have had in the past and to take market share from competitors, I want to see something different than what everyone else is doing.

Continue reading ‘The 4 M’s of Fastenal: Management’

Fastenal: The Big 5 Numbers

Fastenal's Big 5 Numbers
Fastenal’s Numbers (click image for full size)

In the previous post on Fastenal, I listed some of the reasons why Fastenal has a moat and would continue to be a good Big Moat candidate. Fastenal’s Big 5 numbers are shown in the image above and they seem to confirm the moat that Fastenal holds. The only blips have been in Cash Flow which is not a big surprise given the amount of money Fastenal uses to grow the company. They are a company that invests in its own future and the numbers other than cash flow show the success they’ve had.

Are your Big Moat growth rates valid?

In his 2005 letter to the shareholders of Berkshire Hathaway, Warren Buffett states the following about calculating growth rates:

When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate.

When performing Big Moat calculations it is always worth taking second look at the results for the year on which you are basing your calculations. If the starting or ending year you select is grossly out of line with the preceeding and/or following years, your calculations will have little meaning and this could result in a false margin of safety for the stock you’re analyzing.

The 4 M’s of Fastenal: Moat

Fastenal is one company where the Moat is not a question. They have repeatedly shown that they are here to stay and have been doing what is necessary to maintain their position as a leader in the MRO industry. Below are some brief highlights of why Fastenal has such a strong moat.

Brand: Fastenal is known as one of the big competitors in their industry and sometimes they are lumped in with Home Depot, Lowes and other home improvement companies because of the retail side of their business. They also do a huge amount of wholesale business where they compete with Grainger, Hagemeyer, MSC Industrial, Graybar and a few others. The MRO industry is very fragmented but Fastenal has continually remained a well known brand and they have the sales to back it up.

History: Existing customer relationships are very low cost for both Fastenal and their customers. The buying power of Fastenal means that competitors can’t compete with them on price. That means that for a competitor to take away a customer from Fastenal, they will have to provide better service. The cost in changing processes to implement a new supplier is often very prohibitive for the customer which makes sticking with Fastenal a very attractive option.

Wide Customer Base: With 1800+ stores worldwide and thriving retail and wholesale business, Fastenal has a very large customer base. Smaller customers pay higher margins on products while larger customers buy in volume. Both big and small customers have predictable purchasing intervals which allows Fastenal to better manage their own purchasing and inventory.

Distribution and Logistics: For many companies in this industry, inventory management and distribution can be the Achilles Heel. Fastenal has 12 main distribution centers and a truck fleet to deliver inventory to stores as needed. By having a hub and spoke setup, inventory and distribution challenges are kept under control and more easily managed.

In a future post, we’ll examine the Big 5 numbers to see if they back up the moat.

Is Fastenal a commodity distributor?

Phil’s recent post on commodities is useful since we’re taking a look at Fastenal because Fastenal sells a lot of products that can be considered commodities. Go take a look at the left side of the Fastenal home page and you’ll see items such as screws, nuts, bolts, washers, plugs and receptacles. These are all items that have a standard configuration and don’t differ between manufacturers. This leaves the distributor in the position of competing on price. So why would we want to own Fastenal?

The answer lies in the value added services provided by Fastenal. Take a look at their services page to get an idea of what they do that adds more value to the business and probably has a much better profit margin. Another biggie is that Fastenal is leveraging their experience as a distributor who manages a huge amount of inventory to provide vendor managed inventory services to large accounts. This type of outsourcing provides a win-win for all while boosting margin by guaranteeing the sale of product and a high margin service.

The 4 M’s of Fastenal: Meaning

Because of my experience in this industry, I am aware that many MRO companies that have been in existence for a long time can have a lot of challenges to overcome when it comes to changing business processes to work in today’s world. The MRO industry that Fastenal is a part of seems to have a lot of technical challenges in order to bring the company into today’s technical world. The cost is overwhelming, especially when you still do over a billion dollars of business a year and you can get by with the old systems you’ve had for 20 years. Fastenal has committed to making technology something they can leverage to the benefit of all. The president states:

Having great computer systems continues to be a competitive advantage for Fastenal. Our information technology (IT) team continues to redesign and upgrade our systems. They worked all year on a rewrite of our warehouse management system. Installation of this new system will begin in the first half of 2006. They have also made many improvements to our branch point of sale system and our website, fastenal.com. While many companies are outsourcing their IT functions, Fastenal believes our internal ability to quickly modify our systems to meet customer needs is one of our key competitive advantages.

Many MRO companies are now having to change their sales tactics now that Home Depot and some of the other big box retailers have entered the market. Price is no longer king. The true difference for a company in the MRO market will be the ability to successfully sell value added services. The margin on these services are higher than simply selling product but they also do a good job of making you the single source for a customer. Fastenal has made Growth Through Customer Service a key tenet for their future.

While reading the President’s message, he did not dodge the things they were not doing well and addresses them head on. This bodes well for potential investors because transparency has become key in today’s investing world.

For me personally, Fastenal passes the Meaning test of the 4 M’s because I have a good understanding of how the industry works and where many of the problems in this type of business exist. This company is heading in the right direction as far as technology and infrastructure when its competitors are still trying to figure it all out.

Fastenal President’s Letter

Big Moat Candidate: Fastenal

From time to time, I’ll take a look at potential Big Moat candidates based on the research I’ve been doing. The first company I’ll be looking at is Fastenal because I worked for a a company in the same industry as Fastenal for 4 years and we were constantly being compared to the way Fastenal was operating. Here’s a brief summary on Fastenal:

Fastenal Company sells industrial and construction supplies in a wholesale and retail fashion. The Company’s offerings are grouped into 10 product lines: tools, cutting tools, hydraulic and pneumatic products, material handling products, janitorial supplies, electrical supplies, welding supplies, safety supplies and raw materials (metals). Fastenal conducts its business in the United States, Canada, Puerto Rico, Mexico, Singapore and the Netherlands under various trademarks and service marks, including Fastenal, EquipRite, CleanChoice, PowerPhase and FastArc. As of December 31, 2005, the Company had 1,755 store sites located in 50 states, Puerto Rico, Canada, Mexico, Singapore, China and the Netherlands. As of December 31, 2005, the Company operated 12 distribution centers in North America from which the Company distributes products to its store sites.

In the upcoming posts I’ll take a look at the the 4 M’s and the Big 5 Numbers and see whether Fastenal is truly a Big Moat Candidate.