Now let’s analyze the financials of Fastenal for prior years.
Number of shares (in millions, split adjusted):
1993: 303.51
1994: 303.51
1995: 303.51
1996: 303.51
1997: 303.51
1998: 303.51
1999: 303.51
2000: 303.51
2001: 303.51
2002: 303.51
2003: 303.508
2004: 303.508
2005: 302.11
2006: 302.413
2007: 302.521
2008: 301.611
2009: 299.981
2010: 300.181
I’m pleased to see that Fastenal isn’t in the habit of diluting shares.
Net liquidity (in millions of dollars):
1993: -2.2
1994: -6.0
1995: -7.6
1996: -24.6
1997: -38.6
1998: -31.2
1999: -8.6
2000: -10.5
2001: 27.5
2002: 7.6
2003: 20.8
2004: -11.4
2005: -36.4
2006: -83.0
2007: -93.6
2008: -74.3
2009: 59.0
2010: -10.9
Net liquidity per share (split adjusted):
1993: -$0.01
1994: -$0.02
1995: -$0.03
1996: -$0.08
1997: -$0.13
1998: -$0.10
1999: -$0.03
2000: -$0.03
2001: $0.09
2002: $0.02
2003: $0.07
2004: -$0.04
2005: -$0.12
2006: -$0.27
2007: -$0.31
2008: -$0.25
2009: $0.20
2010: -$0.04
We see that Fastenal has over time maintained a net liquidity near zero, the middle ground between having cash languish in the treasury vs. taking on the risks associated with illiquidity. Given the solid economics, I see no reason to be concerned.
PPE (in millions of dollars):
1993: 20.577
1994: 28.086
1995: 42.381
1996: 64.611
1997: 85.297
1998: 111.014
1999: 131.413
2000: 158.829
2001: 186.442
2002: 223.952
2003: 266.325
2004: 311.524
2005: 357.326
2006: 423.124
2007: 465.493
2008: 538.805
2009: 571.467
2010: 632.332
PPE per share (split adjusted):
1993: $0.068
1994: $0.093
1995: $0.140
1996: $0.213
1997: $0.281
1998: $0.366
1999: $0.433
2000: $0.523
2001: $0.614
2002: $0.738
2003: $0.877
2004: $1.026
2005: $1.183
2006: $1.399
2007: $1.539
2008: $1.786
2009: $1.905
2010: $2.106
We can see that Fastenal is expanding. The fact that Fastenal doesn’t have to go deeply in hock to do so is a positive sign. Growth stock fans should be interested.
Cash flow (in millions of $):
1994: 17.577
1995: 32.994
1996: 32.648
1997: 36.402
1998: 71.685
1999: 89.882
2000: 81.547
2001: 131.371
2002: 49.146
2003: 114.301
2004: 118.032
2005: 212.875
2006: 210.265
2007: 332.836
2008: 428.858
2009: 449.523
2010: 345.004
Free cash flow (in millions of $):
1994: 15.519
1995: 30.185
1996: 28.41
1997: 29.941
1998: 63.155
1999: 78.781
2000: 68.406
2001: 115.488
2002: 30.502
2003: 91.906
2004: 91.4
2005: 181.723
2006: 174.532
2007: 290.524
2008: 382.309
2009: 395.643
2010: 287.857
Return on PPE (unsmoothed):
1994: 75.4%
1995: 107.5%
1996: 67.0%
1997: 46.3%
1998: 74.0%
1999: 71.0%
2000: 52.1%
2001: 72.7%
2002: 16.4%
2003: 41.0%
2004: 34.3%
2005: 58.3%
2006: 48.8%
2007: 68.7%
2008: 82.1%
2009: 73.4%
2010: 50.4%
Note that Fastenal’s return on PPE is very good. Even in the worst years, it has a positive free cash flow. You could also argue that the investments in inventory and receivables that penalize earnings (and were unusually large in 2002) are necessary for the company’s growth. That said, the fluctuations in performance show that you cannot count on any company to be 100% immune to the occasional downturn.
The smoothed return on PPE is the 4-year average return on PPE. The smoothed return on PPE for 2010 is the average return on PPE for the years 2007 through 2010. The returns on PPE for these years were 68.7%, 82.1%, 73.4%, and 50.4%, or an average of 68.6%. Multiplying 68.6% by the PPE of $1.905/share at the end of 2009 (beginning of 2010) gives us 2010′s smoothed free cash flow of $1.307/share.
The smoothed returns on PPE for each year are:
1998: 73.7%
1999: 64.6%
2000: 60.9%
2001: 67.4%
2002: 53.0%
2003: 45.5%
2004: 41.1%
2005: 37.5%
2006: 45.6%
2007: 52.5%
2008: 64.5%
2009: 68.3%
2010: 68.6%
We see that Fastenal’s smoothed annual return on PPE is usually between 40% and 70%.
The resulting smoothed free cash flow per share at the end of each year is:
1998: $0.207
1999: $0.236
2000: $0.263
2001: $0.353
2002: $0.326
2003: $0.336
2004: $0.361
2005: $0.387
2006: $0.539
2007: $0.735
2008: $0.995
2009: $1.226
2010: $1.307
To obtain the estimated intrinsic business value, multiply the free cash flow by 10 and then add the net liquidity. In 2010, Fastenal generated $1.307/share of free cash flow and ended the year with -$0.04/share in net liquidity. The resulting estimated intrinsic business value for the end of 2010 (beginning of 2011) is $13.03/share.
The estimated intrinsic business value per share (split adjusted) at the end of each year is:
1998: $1.97
1999: $2.33
2000: $2.60
2001: $3.62
2002: $3.28
2003: $3.43
2004: $3.57
2005: $3.75
2006: $5.12
2007: $7.04
2008: $9.71
2009: $12.46
2010: $13.03
We can see here that Fastenal’s estimated intrinsic business value shows a clear upward trend with only one down year. The intrinsic business value of any good stock should rise over time. A successful company could reinvest its free cash flow into expanding the business and thus increase its free cash flow further, or the company could let the cash accumulate on its balance sheet while maintaining its free cash flow.
Given that we’re close to the end of 2011, you could argue that Fastenal’s current intrinsic business value is higher than the $13.03/share of late 2010/early 2011. Multiplying the 68.6% smoothed return on PPE by the $2.106/share of PPE at the end of 2010 gives us a projected smoothed free cash flow of $1.44/share for 2011. The year is about 96% over, so that means Fastenal has generated a projected $1.39/share of free cash flow. Remember that our free cash flow figure is PRE-TAX, so we must deduct 38% to account for this, which leaves us $0.86/share of projected AFTER-TAX free cash flow. (In 2010, Fastenal earned $430.640 million and paid $163.609 million in current income taxes.) We end up with an estimated intrinsic business value of $13.89/share.
Despite the superior economics, management, and financial performance of Fastenal, the current price ($41.42/share) is substantially more expensive than we’d like to pay.
Part 7 will examine the latest 10Q form to verify that Fastenal’s fundamentals haven’t suddenly fallen off a cliff in 2011.
