Not So Fast, Fastenal

Shares of Fastenal Company (FAST) are taking a big hit today amidst a small recovery in wider equity markets. Shares of the seller of industrial and construction supplies ended the day 9.8% lower at $39.15

Today's Report

Fastenal reported its monthly sales report for May today. The company reported a 18.4% increase in net sales to $274.8 million. Correcting for the fact that May had one more business day this year, sales are up 13.1% on the year. The company opened 6 new stores during the month bringing the total number of operated stores to 2,621. Year to date, the company has opened 38 new stores.

Investors are not happy with the report which seems to indicate that the economy is slowing down and the company is facing stiff competition from the likes of Amazon.com (AMZN). The April sales report showed 17.3% sales growth on the year to $261.1 million, indicating a significant slowdown in the monthly report.

While many investors appreciate the regular monthly updates from the company, the reports can cause a great deal of volatility. Fastenal leaves itself vulnerable to excess volatility in its shares by reporting monthly sales reports which often can include outliers, prompting investors to overreact.

Valuation

Fastenal ended its first quarter of 2012 with $226 million in cash, equivalents and marketable securities. The company operates without short and long term debt for a net cash position of $226 million. Based on today's market valuation of $11.6 billion, the market values the operating assets of the firm at $11.4 billion. This values the firm at 4.1 times annual revenues and 32 times 2011s annual earnings. Competitors W.W. Grainger (GWW) and MSC Industrial (MSM) are valued at 1.5 and 2.1 times annual revenues, respectively. These competitors trade at 19 and 18 times annual earnings.

Currently Fastenal pays a quarterly dividend of $0.17 for an annual dividend yield of 1.7%

Investment Valuation

Amidst two years of double-digit revenue growth and expanding net margins to 12.9% in 2011, profits reported by Fastenal have been growing phenomenally in 2010 and 2011. Shares have advanced from $20 in the beginning of 2010 to peak at $55 in March this year. Since that point in time shares have declined 30% to $39 at the moment amidst renewed worries about the future of the Eurozone and on the back of slowing growth in monthly sales reports.

At the same time the company trades at a big premium compared to some of its competitors and also in absolute terms the valuation multiples are on the high side. Valued at 4 times 2011s annual revenues and 32 times earnings, shares are expensive as margins seem to have reached a plateau of 13%.

Unfortunately I did not have Fastenal on my investment radar earlier, otherwise I would have considered initiating a short position in the company's shares. After a recent correction of thirty percent, I hesitate to initiate a short position and I will definitely refrain from taking a long position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.