Do you invest like Goldilocks, looking for stocks that are neither too hot or too cold but just right? That is what the GuruFocus Stalwarts screener seeks to do - find stocks that hit the sweet spot between decent growth and low risk. This screener is based on a name and an idea from legendary fund manager Peter Lynch. GuruFocus has built this screener to help investors identify stocks with several important criteria.
Those criteria include return on invested capital of at least 14%, a business predictability ranking of at least two out of five stars, being profitable in all 10 years of the past decade, earnings per share growth averaging 10% to 20% per year and revenue growth averaging 8% to 20% per year.
Note the caps on growth rates, which are to keep investors away from the "too hot" stocks that may grow quickly but not necessarily sustainably. Similarly, the minimums provide a base that ensures low-quality stocks do not get on the list.
Fastenal Co. (FAST, Financial) is one of just 56 stocks that made it through the screener as of this writing. It has a $30 billion market cap, and it got its start in business by supplying threaded fasteners.
According to its 10-K for 2022, the company sells "a broader range of industrial and construction supplies spanning more than nine major product lines through a global network of in-market locations utilizing diverse technologies such as vending devices, bin stock devices, and e-commerce." The majority of its transactions are business to business.
At the end of 2022, it operated in 3,306 locations in 25 countries. It sees its trained employees, its “convenient proximity” to its customers and its wide range of products as competitive advantages.
Return on invested capital
Fastenal’s return on invested capital is excellent and industry-leading at 29.22%. ROIC shows us how well a company is using its shareholders’ equity and borrowed funds. In this case, for every $100 used, it earns $29.22, more than double the screener minimum of $14.
And if a company can generate more ROIC than its weighted average cost of capital, then it will create value for shareholders. Fastenal has a history of ROIC roughly tripling the WACC:
Predictability
For investors who like their porridge not too hot and not too cold, predictability matters. They like to know in advance what they can expect, within reasonable limits and subject to external conditions (such as a pandemic or recession).
Fastenal receives a full five out of five stars for business predictability, based on the consistency of its revenue and Ebitda over the past 10 years. Revenue has grown by an average of 8.8% per year over the past decade; Ebitda has grown slightly faster at an average of 9.20% per year. Both show consistent growth.
The fact that Ebitda has increased more quickly than revenue is also a good sign, indicating the company is efficient in its operations and overall business.
Profitability
Fastenal has a 10 out of 10 rating for profitability. Looking more closely, it also has watched its costs and other spending carefully.
For example, it noted in the annual filing that “the vast majority” of its growth has been organic. It has made several acquisitions over the past decade, but done so cautiously. As management wrote in the annual filing, acquisitions bring with them multiple risks and challenges.
On the cost side, the following chart shows how cost of goods has increased slightly more slowly than revenue over the past decade, while general and administrative expenses have been flat.
Growth
One way in which the company delivers smooth and consistent revenue growth is through its mix of branch locations and on-site locations. The latter are often embedded in customer locations, providing immediate inventory and staff who become fully familiar with customers’ needs.
Over the past decade, Fastenal has cut the number of branch locations while increasing the number of on-site locations. Of the 3,306 locations at the end of 2022, roughly half were on-site.
This on-site strategy provides several competitive advantages. The locations are directly connected with customers, reducing the likelihood of competition and eliminating what might be downward pressure on prices.
According to the company's annual filing, “Our Onsite service model provides us with a strategic advantage with our larger customers. Building on our core business strategy of the local branch, the Onsite model provides value to our customers through customized service while giving us a competitive advantage through stronger relationships with those customers, all with a relatively low incremental investment given the existing branch and distribution structure.”
Revenue growth over the past decade has averaged 8.40% per year, which is just above the Stawlarts screener's floor of 8%. Over the past 10 years, earnings per share without non-recurring items also grew steadily. While it was consistent, it just barely makes the cut, averaging 10.50% per year over the past decade. That’s just half a point above the base requirement of 10% per year.
Valuation
Fastenal has a GF Score of 98 out of 100, which means that according to a historical study by GuruFocus, it has good potential to outperform. That is due in part to high rankings for financial strength, profitability and growth. It currently has a dividend yield of 2.48% and has been repurchasing shares.
Eight gurus followed by GuruFocus owned shares at the end of 2022. According to 13F filings, Baillie Gifford (Trades, Portfolio) held 3,019,923 shares, Mairs and Power (Trades, Portfolio) accounted for 2,963,459 shares and Jim Simons (Trades, Portfolio)' Renaissance Technologies held 1,061,288 shares.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Institutional investors’ stake was 58.96% and insiders held a healthy portion at 4.57%.
In summary, Fastenal is a good stalwarts company, even though its revenue and earnings per share without NRI growth are barely above the minimum. Its ROIC is high, nearly double what is required, it produces predictable revenue and Ebitda, while it also has been profitable every year for the past decade. Investors searching for a steady, stable stock might consider adding Fastenal to their short list.
