Yahoo Finance Is Fastenal Company (NASDAQ:FAST) Spending Too Much Money?
If you are currently a shareholder in Fastenal Company (NASDAQ:FAST), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine FAST’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Check out our latest analysis for Fastenal
What is free cash flow?
Fastenal’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Fastenal to continue to grow, or at least, maintain its current operations.
I will be analysing Fastenal’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Fastenal’s yield of 2.29% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Fastenal but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Fastenal?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at FAST’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 52.9%, ramping up from its current levels of US$603.5m to US$922.7m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, FAST’s operating cash flow growth is expected to decline from a rate of 28.9% in the upcoming year, to 8.4% by the end of the third year. But the overall future outlook seems buoyant if FAST can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Fastenal relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Fastenal to get a more holistic view of the company by looking at:
Valuation: What is FAST worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FAST is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Fastenal’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
