Because Fastenal’s free cash flow for 2011 has fallen somewhat short of expectations, we’re playing it safe and using the numbers from the end of 2010 (start of 2010) to make our appraisal. These numbers are:
Free cash flow: $1.307/share
Net liquidity: -$0.04/share
Estimated intrinsic value: $13.03/share
The stock price of $41.42/share is triple our estimated intrinsic value. Thus, this stock will NOT be added to the Doppler Value Investing Model Portfolio, and I will NOT be buying it personally.
The estimated intrinsic value is analogous to book value. Let’s call it Doppler Book Value. Thus, the Doppler price/book is 3.2. The conventional price/book ratio is $4.77. If Fastenal were selling for Doppler book value, it would still be selling for 2.7 times its conventional book value, which is a high ratio. Thus, Doppler Value Investing shows that Fastenal’s intrinsic value is substantially higher than what’s shown by conventional book value.
Because we take into account net liquidity, the stock price has to be adjusted to take this into account. If the net liquidity were positive and equal to the stock price and we could buy the entire company at the current market price, we’d be getting the business for free. On the other hand, if the company had heavy leverage, the adjusted price would be higher than the current market price. Again, if we could buy the entire company, we’d take on all of the liabilities, so the effective price would be higher.
For Fastenal, the net liquidity is a negative 4 cents, which is minuscule. So our effective price is $41.46, 4 cents more than the $41.42 market price. This adjusted price is what we compare to free cash flow. If we didn’t make this adjustment, we’d be penalizing liquid companies and giving brownie points to leveraged ones.
The free cash flow is analogous to earnings. Let’s call it Doppler Earnings. Fastenal’s Doppler Earnings are $1.307/share. The Doppler PE ratio is the adjusted price ($41.46) divided by the Doppler Earnings ($1.307), or 32. If Fastenal were selling for its Doppler Book Value of $13.03, the adjusted price would be $13.07, and the Doppler PE ratio would be 10. While a PE ratio of 10 sounds low, please keep in mind that Doppler Earnings are pre-tax while conventional earnings are after-tax. Income taxes are dependent on earnings, and earnings can be temporarily boosted or suppressed by arbitrary one-time factors.
The Doppler Earnings Yield is the Doppler Earnings ($1.307) divided by the adjusted price ($41.46), which is 3.2% for Fastenal. If Fastenal were selling for its Doppler Book Value of $13.03 (adjusted price of $13.07), its Doppler Earnings Yield would be 10.0%.
The 12-month trailing earnings of Fastenal are $1.13/share, and the conventional PE ratio is 36.7. If Fastenal were trading at its Doppler Book Value of $13.03, the PE ratio would be 11.5.
In order for Fastenal to be a Graham-and-Dodd bargain, it would need a Doppler Earnings Yield of 15% or more (a Doppler PE ratio under 6.7). This would mean a stock price of $8.67 or less, which would present a Doppler price/book ratio of under 67%, a conventional PE ratio of 7.7, and a conventional price/book ratio of 1.8.
The bottom line: Fastenal is an excellent company. It has a wide business moat and a frugal, shareholder-oriented management that isn’t out to brown-nose Wall Street. This is exactly the type of company that Warren Buffett and Charlie Munger would like to buy and that I would like to buy. Unfortunately, the current stock price is too high.
Fastenal is a company worth watching. At a low enough price it’s a steal. I’m hoping that CEO Willard Oberton gets caught lip-syncing on Saturday Night Live so that bargain hunters like myself get a chance to scoop up shares at a good price.
This concludes my analysis of Fastenal.
