After drifting back toward their 52-week lows during the overall market malaise of July and August, shares of Fastenal
For Fools not familiar with the company, Fastenal sells industrial and construction supplies via wholesale and retail avenues, all conveniently located close to customers like MasTec
Net sales for the quarter advanced 16.9% to $470.1 million, while net earnings jumped 17.8% and diluted earnings grew a more impressive 20% to $0.36 per share. Sales and earnings growth for the nine-month period ended Sept. 30, 2006 was right at 20%, as well. According to the earnings press release, Fastenal aims to grow its store count by 13%-18% annually. With 1,755 stores as of Dec. 31, 2006, management has previously stated that it believes it can still double its store count before market saturation even becomes a concern. Plus, it has only closed 10 stores -- ever.
The one knock I've had against Fastenal lately is that operating cash flow has been running below reported net income, due to rising inventory and trade accounts receivables. The recent nine-month period was no exception, causing cash on hand to fall from $56 million to $7 million. I'm watching the trend, but deferring to the company's storied history of expanding its store count with a focus on prudently managing working capital.
Another concern I have is the stock's lofty P/E multiple. It currently trades at 30 times trailing earnings and nearly 25 times projected 2007 earnings, likely reflecting its growth track record and analysts' confidence that growth going forward will be equally robust. In hindsight, July may have been a good entry point, but as most of the company's clients are subject to fluctuations in the economic cycle -- thanks to their industrial and manufacturing exposure -- there could be better opportunities to get into the shares in the future. Until that time, Fastenal remains on my all-star watch list.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to further discuss any companies mentioned. The Fool has an ironclad disclosure policy .