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No. of Recommendations: 6
Hi Peter;

Thanx for the kind words, but just to be transparent, I don't follow any companies, including the ones I own. Not one.

As a sideline, I generate worksheets for folks that are in the investment business. The ones they want they pay me for, the ones they don't I post for others to use if they would like. As I say in my post, the idea is for the reader to decide if they have any interest in the stock and then go and start their due diligence process, whatever that may be.

Additionally, as I note in my posts, ALL of my work is based on a company's annual 10-K filing. I have never used a 10-Q in my valuation work. So it may appear I have missed a split or my numbers are skewed for some reason, and certainly just like anyone else I make mistakes, but generally the differences come down to events that occur during the current (uncompleted) fiscal year verses the prior (completed) fiscal year financial information.

As to borrowing money to pay dividends, I don't remember Exxon doing that, but several years ago after Royal Dutch bought British Gas, they did that and also back in 2008-2009 maybe? I own shares of both Exxon and Royal Dutch, but as I say, I don't really follow them.

For the rest of the post, the ratio simply places greater emphasis on cash than debt. Nothing more and nothing less. How the company spends its cash is up to the company. I personally prefer companies that stock pile, for want of a better term, their cash. To me, companies that do so, are in a much better position to gain market share during tough economic times. Call it dollar cost averaging for business, call it the random considerations of a paranoid investor, call it whatever, it's just my approach to investing.

Certainly, like anyone else, I am not adverse to receiving a dividend. Royal Dutch and Exxon both pay fair dividends but in the end, that was not the reason I bought them. I bought them because I believe over time, the stock price will appreciate. How management makes that happen, acquisitions, stock buy backs, whatever, is up the board of directors, not me, I'm just along for the ride. And as such, if I don't believe management is living up to its fiduciary responsibility to the company's shareholders, of which I am one, I can sell my shares and invest elsewhere.

Wax
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No. of Recommendations: 8
Fastenal is a company that is never really cheap.

Fastenal is like Costco for me: very high quality company, everybody knows it, so is almost never cheap. Similar to Costco, I keep an eye on it. If a recession hits it might sell for a good price.


At the simplest level, a stock is worth only what it pays you directly. Fastenal’s Old School approach to dividends makes a dividend discount model applicable.

DDM isn't my favorite model. A company's dividend payment can be made independent of cash flows, at least for a while. Kinder Morgan (KMI) was a good example of this a few years ago: take on debt, use it to pay out a dividend. If you used DDM back then you'd say KMI was undervalued. If you looked at cash flows you'd say it was overvalued (and you'd be right). If you do use DDM, make sure to look at the payout ratio, checking to see if it's conservative and sustainable. A 60%+ payout ratio doesn't sound unreasonable for a company like FAST, which has a software industry-like mid 20% return on capital. Reinvestment needs are not high.


From a more detailed DCF perspective, Fastenal provides a tougher task. It simply doesn’t display the kind of predictable growth that you’d like to build a plausible model. I’ll try anyway. (Love some feedback here…)

Identify the peaks and troughs, and look at long term averages and trends. Find out what the 3, 5, and 10 year CAGR of revenue has been. Use that as your foundation for future growth, adjusting based on any insight you might have if you think something will change. I also look at 3, 5, and 10 year averages for operating margin, tax rate, etc.


Mike
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No. of Recommendations: 4
I am not a fan of the DDM either. Royal Dutch and some of the other major oil companies have done that in the past and while it looked good on the surface, their cash to debt ratios were so skewed the stocks did not look like attractive investments.

So to me, the dividend is the dividend, and while it is part of my five year look back when I am valuing a company, it is always a stand alone consideration. For Fastenal, had you invested $10K five years ago (12/31/2013) and then sold it (12/31/2018) you would have received 210.48 shares of stock and it would have paid you $259.97 over that five year period. Welcome to beer money.

I am personally not really attracted to dividends, however I am attracted to a company's ability to generate more cash than debt which why I like to compare a company's Enterprise Value to its Equity Value. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at rate equal to or faster than it generates debt.

For Fastenal my enterprise value (market cap plus debt less cash) is $32 and my equity value (market cap plus cash less debt) is $29, making my Enterprise to Equity Ratio, 0.9.

Wrap it all up and I think the stock is currently worth about $50.

Wax
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No. of Recommendations: 6
Hi Wax,

Thanks for the reply.

I saw the valuation sketch for Fastenal that you just posted on your board, with a link to your spreadsheet. That's an incredible amount of information. And you follow so many companies. It must be a lot of work to maintain. Lots of interesting stuff to go through...

You wrote:

"I am not a fan of the DDM either. Royal Dutch and some of the other major oil companies have done that in the past and while it looked good on the surface, their cash to debt ratios were so skewed the stocks did not look like attractive investments."

Sure. Borrowing money to pay a dividend is sometimes done. I'm not sure that's what RDS and XOM were doing. They have massive capital needs for leaseholding and inventory driving their debt load too.

Sometimes debt is drawn to keep the divi streak alive though and that's not a good thing. I'll agree on that point. Sometimes its for sound reasons though. AAPL borrowed cash to untrap overseas cash hoards. Aflac borrowed cash in the US for a similar reason. Cash was trapped in Japan for a stretch for regulatory reasons as their politicians rewrote national insurance regs. They were overcapitalized, but the industry was effectively frozen as they waited for the final regs. So, they borrowed cash here and returned capital from Aflac Japan after the legal wrangling was complete. Just two examples that I'm familiar with. I'm sure there are others.

If it's done for the wrong reason, that's also going to show up other ways in their financials. Their payout ratio will look unsustainably high and their leverage will ramp if they're increasing LTD and not retaining earnings. I guess what I'm saying is that before you'd ever consider a DDM, there's some due diligence that should have been done in the first place. And that DD would apply for any model.

What I like about divis is not necessarily getting them. What I like about them is that they show evidence that management notices that I'm a stakeholder and that I deserve a cut. There are plenty of management teams out there that rarely think of shareholders at all. By default, I guess I'm more suspicious than trusting of management.

You also wrote:

"I am attracted to a company's ability to generate more cash than debt which why I like to compare a company's Enterprise Value to its Equity Value. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at rate equal to or faster than it generates debt.

For Fastenal my enterprise value (market cap plus debt less cash) is $32 and my equity value (market cap plus cash less debt) is $29, making my Enterprise to Equity Ratio, 0.9."


If I'm understanding this (and I might not be), the ratio is looking at a company's accumulation of cash, not its ability to generate it. I understand that you're not interesting in dividends, but they are cash that Fastenal generated. You're ignoring that cash flow with this calculation and effectively penalizing them for paying one.

There's another $442 million of cash generated in 2018 that the balance sheet snapshot won't see because they returned it to shareholders rather than piled it up on their books. And that's just from one year. Over the last five years, Fastenal paid $1.8 billion in dividends. If they had retained that instead, they'd look golden by the E2E ratio with $1.9 billionish in cash and $500 million in debt. But they'd be exactly the same company from a FCF perspective. They just chose to put the cash in my pocket so I could buy some beer. I don't see how keeping it and earning 0.1% is the better choice than paying for my beer. I like beer :-)

In my book, if a company retains earnings it should be for capital expenses that promote growth, working capital needs, or acquisitions that add strategic or new product lines. (And even these need to be bought at the right price.) I have no problem with Buffett keeping my coin because I know that he's going to do something with it eventually. And that something is more often than not extremely profitable not to mention more tax efficient. But how many companies have management with his skill set? Not many. How many have his credibility? None. What's Fastenal going to do with it? If they don't see anything immediate to do with it, they should give it to me.

More to the point, if I see a company piling up cash for 12 quarters and doing nothing with it, I start to ask about their priorities. They don't see that money as mine. They might actually see it as theirs. They might even actually see me as a nuisance. If they feel a divi is inefficient, they should be buying back shares and creating shareholder value, not building their C&E just for the sake of doing so. A divi speaks to management's credibility and efficiency IMO. It's value is in what it represents.

Just my 2 cents,

Peter
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No. of Recommendations: 6
Hi Peter;

Thanx for the kind words, but just to be transparent, I don't follow any companies, including the ones I own. Not one.

As a sideline, I generate worksheets for folks that are in the investment business. The ones they want they pay me for, the ones they don't I post for others to use if they would like. As I say in my post, the idea is for the reader to decide if they have any interest in the stock and then go and start their due diligence process, whatever that may be.

Additionally, as I note in my posts, ALL of my work is based on a company's annual 10-K filing. I have never used a 10-Q in my valuation work. So it may appear I have missed a split or my numbers are skewed for some reason, and certainly just like anyone else I make mistakes, but generally the differences come down to events that occur during the current (uncompleted) fiscal year verses the prior (completed) fiscal year financial information.

As to borrowing money to pay dividends, I don't remember Exxon doing that, but several years ago after Royal Dutch bought British Gas, they did that and also back in 2008-2009 maybe? I own shares of both Exxon and Royal Dutch, but as I say, I don't really follow them.

For the rest of the post, the ratio simply places greater emphasis on cash than debt. Nothing more and nothing less. How the company spends its cash is up to the company. I personally prefer companies that stock pile, for want of a better term, their cash. To me, companies that do so, are in a much better position to gain market share during tough economic times. Call it dollar cost averaging for business, call it the random considerations of a paranoid investor, call it whatever, it's just my approach to investing.

Certainly, like anyone else, I am not adverse to receiving a dividend. Royal Dutch and Exxon both pay fair dividends but in the end, that was not the reason I bought them. I bought them because I believe over time, the stock price will appreciate. How management makes that happen, acquisitions, stock buy backs, whatever, is up the board of directors, not me, I'm just along for the ride. And as such, if I don't believe management is living up to its fiduciary responsibility to the company's shareholders, of which I am one, I can sell my shares and invest elsewhere.

Wax
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