I bought this stock originally based on a M* rec, watched it decline with the home builders, sold it for a tax loss but vowed to buy it back.I did buy it back, last week. Today, they posted good results and the stock reacted very nicely (my motto is better lucky than good!). see http://news.morningstar.com/news/ViewNews.asp?article=/PR/20070412AQTH042_univ.xml&pgid=qtqnPress1Time for a IMRICHDAD evaluation update? The last one was excellent! As is the company.Cheers,Scott
Hi Scott,Thanks for the kind words.I haven't had a chance to study the earnings release, yet. Apparently they were pretty good judging by Mr. Markets response to the news.I did recently review the Annual Report I received in the mail just a few days ago and was once again totally impressed by the candor, frankness and financial soundness of the company. This is a great company run by outstanding management period.My bottom line hasn't changed and that is this stock is a keeper. Simply, buy on the dips and hang on. Long term we will all do very, very well.Rich
I agree ...nice buffet type stock.. Boring but solid business. But I hear varying opinions on the DCF intrinsic value and at the current price it doesn't provide a large margin of safety. Thoughts?Can someone provide a different viewpoint on DCF? Let me dig up the old post.
Rich and Scott, Here is from another forum a poster's perspective with his "quick n dirty" take. The poster was looking for feedback and is buffeteer/greenwald type investor.Would love your opionion========================================================================Their business fundamentals look impressive. Their ROE has actually been increasing over the last few years amid some fairly rapid expansion. They certainly seem to be operating very well and I can understand why their CEO was voted CEO of the year. The problem however is in their current valuation, which I believe to be much too high.I ran a two part DCF calculation based on some of the info from the 10-K. First, they have predicted that they can open up to 3500 stores in NA and at a 15% growth rate they will reach that level in 2010. After that I assumed a PE of 17 based on WMT today because they will likely find the same ROE erosion as WMT did as they attempt to expand globally. I looked at several ways to get shareholder FCF from 2007 to 2010 and the way I liked best was to simply take their payout percentage over the last two years in dividend and share buybacks of roughly 40% and project that onto to net earnings. That seemed to make the most sense since I do not expect any changes to their capital structure at this time.Year / Net Earnings / Payout (All numbers in millions)2007 / 230 / 922008 / 265 / 1062009 / 304 / 1222010 / 350 / 1402010 Terminal Value - $5,950Using this method I then discounted the cash flows by various discount rates and divided by the 151MM OS shares.6% - $348% - $3110% - $2912% - $27 As you can see, there is no factor of safety here. It seems to be a case of a well known darling of the street that was priced for absolute perfection and still hasn't gotten down to where it really should be. One thing that could change these calculations though is leverage, which they currently don't use. There may be some fundamental reason for this that I'm not aware of so I would not like to make any assumptions that it will change in the future. It does however make them a potential takeover target if the shares ever do get beaten down.
Hi aikido10,Would love your opinionWell, the poster, whoever they are, is certainly entitled to their opinion. My initial reaction is that there are certain strengths evident in FAST that does not seem to be taken into account in the valuation (it's difficult to know for sure because many details were omitted). This is either by the choice of the analyst or because it is a "quick n dirty" take and the analyst was unaware of them.First, there is this interesting table that keeps being repeated in the 10K's which shows average sales for FAST's stores based on the age of the store:Age of store site as of Year opened Average Average Percent 31-Dec-06 sales 2005 sales 2006 Change 0–1 year old 2006 — 134 — 1–2 years old 2005 162 492 — 2–3 years old 2004 501 647 29.2 3–4 years old 2003 575 684 19 4–5 years old 2002 643 743 15.6 5–6 years old 2001 841 978 16.3 6–7 years old 2000 752 811 7.9 7–8 years old 1999 898 991 10.4 8–9 years old 1998 996 1,146 15.1 9–10 years old 1997 1,032 1,135 10 10–11 years old 1996 1,062 1,108 4.3 11–12 years old 1995 1,085 1,206 11.2 12–16 years old 1991-1994 1,279 1,396 9.1 16+ years old 1967-1990 2,244 2,419 7.8Because this table is displayed repeatedly in every FAST 10K I've looked at, I believe management thinks it is important and I think it's important too. (I'm convinced that there is not a single unnecessary word in the 10K's, management is impressively concise, to the point, and doesn't waste their time or ours with “fluff”).My take on this table is that sales at a store built today will see significant growth over at least 16 years. If this trend continues, just because the building of new stores ceases in 2010 as the analyst theorizes, it does not mean growth will turn flat in 2010. More likely growth in sales will turn flat some 10 or 15 years later, in 2020 or 2025 if new store builds cease in 2010. I don't think the valuation that you posted, aikido, accounts for the sales growth shown in this table.Also, the 3500 store count is simply a current target or goal for the company. These numbers are continually revised by companies. SBUX recently adjusted upwards their ultimate goal for stores. FAST could conceivably increase the number of store locations feasible for NA. Also, I think expansion into Europe and Asia is possible.The latest 10K goes to some length in discussing ongoing initiatives aimed at improving efficiencies: the CSP2 store conversion, the new CSP3 store conversions, the National Accounts Group reorganization, and the new Indianapolis warehouse. I expect all of these initiatives to either increase sales or reduce working capital requirements and in both cases that will result in an increase in Free Cash Flow and the value of the company. Again, I don't think the valuation you posted accounts for these initiatives.What new and future initiatives will FAST implement in the years ahead that will target further increases in sales or even greater efficiencies? I think there will be many and I don't think they were accounted for in the valuation you posted.The details of the DCF calculations weren't given by the poster so it is hard to verify for sure. But, if I understand the method employed it is a simplified method that, in the case of FAST, misses much of the intrinsic value of this company. I prefer my original posted valuation technique a few threads back to the one employed by this poster.With all that said, I'm going to admit that FAST is no screaming bargain in a Ben Graham sense. But, FAST is without question a wonderful company and I think even at the current quotation is fairly priced. As Buffett has said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Rich
Age of store site as of Year opened Average Average Percent 31-Dec-06 sales 2005 sales 2006 Change 0–1 year old 2006 — 134 — 1–2 years old 2005 162 492 — 2–3 years old 2004 501 647 29.2 3–4 years old 2003 575 684 19 4–5 years old 2002 643 743 15.6 5–6 years old 2001 841 978 16.3 6–7 years old 2000 752 811 7.9 7–8 years old 1999 898 991 10.4 8–9 years old 1998 996 1,146 15.1 9–10 years old 1997 1,032 1,135 10 10–11 years old 1996 1,062 1,108 4.3 11–12 years old 1995 1,085 1,206 11.2 12–16 years old 1991-1994 1,279 1,396 9.1 16+ years old 1967-1990 2,244 2,419 7.8
TMFRich here is a response from BSCARTER>>>The details of the DCF calculations weren't given by the poster so it is hard to verify for sure. But, if I understand the method employed it is a simplified method that, in the case of FAST, misses much of the intrinsic value of this company. I prefer my original posted valuation technique a few threads back to the one employed by this poster.<<<I thought I explained my DCF very well. It was certainly quick and dirty, but it made the most sense out of the information available. The payout in 2005 & 2006 through both dividends and share buyback was 39% and during this time they were able to grow equity at 13% and 15% respectively. Using these assumptions and also assuming that ROE would remain stable (due to no changes in capital structure) I based my DCF from now until full NA saturation on a 40% payout of earnings (rounding up from the 39% in the past two years) after which ROIC would drop as it has with others when they transitioned from a mainly domestic retailer to a global one. To argue against this method would be to say that there was additional free cash that was stashed away somewhere (which I didn't see) or that they will be able to expand globally as easily as they have domestically, which I simply don't believe to be true.>>>With all that said, I'm going to admit that FAST is no screaming bargain in a Ben Graham sense. But, FAST is without question a wonderful company and I think even at the current quotation is fairly priced. As Buffett has said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”<<<Well I certainly agree with him on his first sentence and I also agree that FAST is a wonderful company, however I don't believe that it is fairly priced. It doesn't seem that the market agrees with me right now based on recent performance of the stock, but then again the market doesn't look very far down the road either and the cyclical market for their products has been at peak level lately. There is always the chance that management decides to employ leverage to increase the FCF sometime in the future, but that would also be balanced to some extent by the fact that you would naturally want to use a higher discount rate in the valuation of a company using leverage vs. one that doesn't. Right now it seems that Mr. Market is very much in love with the FAST story and believes that it will somehow become the SBUX of construction fasteners with a store in every village of the world. If I had to make an investment in them right now I'd have to say the short side looks much more attractive.
Continue.....There is something I must be missing in Rich's evaluation (or that Rich is missing). He is using an 8 year period of high growth of between 12-30% before they reach the saturation level of 3,500 stores in NA & PR, but they currently have 1,996 stores operating in this region. In an 8 year time period a CAGR of 7.275% gets you from 1,996 to 3,500 so I don't see where he is getting his prediction of 12-30% growth if he is excluding global expansion (which he claims that he is).>>>An 8 year high growth period was selected because that is my estimate of when the company will reach the North American market saturation point with stores (3,500 store count) at about the current build rate. This means that the IV's given do not include any beneficial effects of expansion into other parts of the world.<<<
As Buffett has said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Rich,I've listened to their conference call and visited their stores (I am a self-confessed tool freak, hotrodder and handyman type). I wish I'd known about FAST stores years ago. They are full of the kind of tools, parts, materials and things guys like me can never find in HD or LOW. Granted, they are low overhead, out-of-the-way places, but once we find them, we never forget. And we're just the amateurs--these people fill a need felt by the automotive, construction and other businesses. I can't imagine they'll reach saturation at 3,500 stores. But their fortunes are tied somewhat to construction and automotive, which is why their stock price declined last year in my opinion. Still, revenues and earnings remained strong because management remains strong.Strong management, consistent performance, consistent growth and a wide moat. I doubt anyone could make a legitimate case for funding an attempt to compete with them head-on. Nardelli was headed in that direction at HD--now he's gone and that division is on the block.I just think a pure DCF approach can fail to take all these factors into proper account. Cheers,Scott
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