Daniel Florness, the CFO of Fastenal Company (NASDAQ:FAST), purchased just over 2,600 shares of the company’s stock on December 5th at a average price of $41.50, according to a filing with the SEC. Florness now owns about 45,000 shares of the stock between his direct holdings and his 401k plan. Fastenal Company is a wholesaler and retailer of industrial and construction supplies including bolts, nuts, and screws.
Insiders should be reluctant to purchase shares in the company they work for because they already have a tight economic connection in the form of their income; they should prefer to diversify their wealth unless they are very confident in the future. This is one reason why studies show that stocks bought by insiders tend to outperform the market (read more about studies on insider trading). Our database of insider trading filings shows that Florness had bought a small number of shares in May at a slightly higher price than where the company is currently trading (see a history of his insider purchases). However, our records also show a smaller (1,000 share) buy by another insider in November. Consensus insider buying is a particularly bullish signal and so we think that it is useful to look more closely at the company.
In the third quarter of the year, Fastenal Company reported a 10% increase in revenue compared to the same period in 2011. With costs held in check, earnings grew 13% bringing the growth rate of net income in the first nine months of 2012 down to 19%. That is decent business performance, but at a market capitalization of $12.5 billion, Fastenal trades at 31 times trailing earnings. We like that the company has been growing, but it would need to continue its current growth rates for quite some time in order to justify that valuation. Even in terms of consensus 2013 earnings, the P/E multiple is 26.
We also track hedge fund activity, and while limited there were some managers buying into the stock last quarter. Billionaire Steve Cohen’s SAC Capital Advisors initiated a position of 1 million shares in Fastenal during the third quarter of 2012 (check out Cohen’s favorite stocks). Conatus Capital Management, which has $2 billion under management despite only being founded in 2008, also took on a position in the stock. Conatus is managed by David Stemerman, who had previously worked at Lone Pine Capital. See more of Stemerman’s stock picks.
MSC Industrial Direct Co Inc (NYSE:MSM) and W.W. Grainger, Inc. (NYSE:GWW), two other industrial equipment wholesalers, are two of Fastenal’s peers. Each of these companies’ stocks trades at a significant discount to Fastenal: they are priced at 17 and 20 times their respective trailing earnings. MSC not only carries a lower multiple, but grew its revenue and earnings at double-digit rates last quarter versus a year earlier. While there certainly are significant differences between it and Fastenal, it could be worth considering as a value stock and we’d certainly need to see much better prospects for Fastenal to consider that company a better buy.
We can also compare Fastenal to WESCO International, Inc. (NYSE:WCC) and Anixter International Inc. (NYSE:AXE), though these companies tend to focus more on electrical and communications equipment. These stocks have higher betas, coming in closer to 2 while the other three companies we’ve discussed have betas between 0.9 and 1.2. They are also even cheaper than MSC, with trailing P/E multiples in the 12-14 range. WESCO also stands out for seeing good revenue and earnings growth in addition to its valuation, though the stock is widely shorted and so we’d be careful to look for reasons why that is the case if we studied it further.
We don’t think that this is a good insider purchase to imitate. The growth numbers at Fastenal look good but the current valuation already captures quite a bit of expected earnings growth over the next several years. Peers such as MSC might make for better value investments.