As fellow Fool David Marino-Nachison pointed out a little while back, Fastenal
Maybe Fastenal's secret is that it's easy to be forthcoming with investors when you really don't have much to hide. Sales grew almost 25% for the first quarter, and earnings came in nearly 32% higher than the prior-year period. EPS growth was even better at 53%.
Although gross margins were down very slightly from the prior year and prior quarter, the company more than recouped this at the operating level. Operating margin for March was 16.8% -- well above both last year's 15.9% and last quarter's 15.8%.
The big secret behind Fastenal's growth really isn't too much of a secret -- the company is both selling more at each of its stores and rapidly adding more stores. The company opened 74 new stores in the first quarter of 2005 and expects a total of 200 to 275 new stores before the end of the year.
While the company won't be able to maintain its target of 13% to 18% annual new-store growth forever (lest it become more ubiquitous than Starbucks
In the meantime, Fastenal is producing a return on equity in excess of 20%, paying a respectable dividend, and not diluting its shares to pay for its growth.
That's not to say, however, that Fastenal is the perfect stock. Valuation is not exactly dirt-cheap, and the company doesn't seem to produce as much free cash flow relative to sales as you might think it should. What's more, growth is inextricably linked to the health of the U.S. economy, and particularly to the health of the manufacturing sector. If that all goes into the tank again, it'll be tough for Fastenal to maintain such a high pace of growth.
But for now, at least, things are going well for the company, and its growth, margins, and return on capital are all nice and robust. Maybe I can't say that Fastenal is a tremendous bargain -- trading at about 29 times trailing earnings -- but I can say that management seems to have shareholders' interests at heart, and that, my friends, is often a good predictor of long-term investment success.
Sometimes a company's growth is just too good to ignore, and you've got to break some investment rules to own it. To learn about such stocks, try a free trial to our Motley Fool Rule Breakers newsletter.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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