DGI Adventure – 10-18-2015 Limit Order Placed – Fastenal Company (FAST) – $36.75/share

Dividend Cycle

FAST goes ex-dividend this Friday, 10/23/15. In order to
collect the 4th quarter dividend of $0.28/share one must own shares
prior to that date. All four quarterly dividends this year have been that
amount. The last dividend increase was in January of 2015. FAST is a dividend
contender having raised their dividends for 16 consecutive years.

Investment

I would like to be a shareholder of record before that ex-dividend
date. So I’ve placed a limit order for 40 shares at $36.75/share for a total
investment of $1,476.95 (including $6.95 trade commission). Why do I want to be
a shareholder in this company?

The QC (Quantitative
Case)

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LOL (Limit Order
Logic) – $36.75

There’s not a lot of time for this order to execute before
the ex-dividend date. The share price closed on Friday at $37.49, so the limit
represents a ~2% decline from the current price. In the short term technicals there
is support at $37 which was the closing price on August 25th, and
then at $35.50 on October 1st; the intraday low that day set the
current 52-week low. Interestingly that low set on 10/1/15 corresponded to a
higher low on the RSI.

FAST – 6 month chart as of 10/18/15 – Chart from Yahoo
Finance.

Long-term, the stock is in a flattish but downward
trend. The company has been struggling a bit to match the astronomical growth
it’s had over the last 10 years, and Mr. Market is not pleased. That flattish
downward trend is a pretty long consolidation/correction period. No idea what
wave count we’re in, but it seems like it’s about time to start the next wave
up. We’re getting stretched below the 50 day moving average, and I don’t know
how long it will stay this low. There is another interesting technical support
at the $36.65 level dating all the way back to June of 2011. Take a look at the
longer term chart below: 

FAST – 5 year chart as of 10/18/15 – Chart from Yahoo
Finance.

$36.75 seems about as good a spot as any to me. It
represents just a bit over a 3% yield, which is important to me. And it doesn’t
seem outrageous for the stock to drop just 2% more this week.

QWaF (Qualitative
Warm and Fuzzy)

Fastenal sells nuts and bolts. Everybody needs nuts and bolts.
They’re business is extremely sticky, half of their fastener sales are for
ongoing maintenance while the other half comes from new manufacturing of equipment.
New manufacturing is cyclical. R&M is not. Non-fastener sales, which would
also fall under the maintenance/supply category is also quite sticky and
getting stickier. Their onsite vending machine initiative is a fantastic way to
incubate customer loyalty.

The vending machine business is growing and they’re hiring.
Adding personnel is a good thing.

Check out the recent Q3 earnings press release: http://investor.fastenal.com/releasedetail.cfm?ReleaseID=936280

It was actually an okay quarter, and overall they’re still
growing. It’s not crazy growth, but it should be enough to support a very
healthy DGR, which is what I care the most about. Their dividend cushion can
easily absorb 7.5% DGR without any operational cash flow growth, but operation
cash flow is growing, so the dividend growth prospects seem fine to me. Oh
yeah, and they’re buying shares too. Not only did the company buy back over
6.5M shares. Insider ownership is a very respectable 13% of outstanding
shares.  Count me in.

CPR (Cold and Prickly
Risks)

Probably the two biggest headwinds faced by the company at
the moment are

1)     
Cyclical issues with heavy manufacturing serving
commodities focused businesses i.e. oil & gas and mining.

2)     
Strong dollar (which is related to headwind #1)

Fortunately the company generates a fair share of its income
from non-cyclical maintenance needs of its customers.

There is also a bit of a market saturation
issue. Morningstar, who rates FAST a 4-star stock with a fair value at
$42/share, points out in their analytical report that new store growth is
probably waning, and that same store growth and the vending machines will need
to drive growth going forward. This is in contrast to the Q3 press release
which says the company plans to increase their store count by 2-3% in 2016
(Morningstar anticipates 0-1% new store growth). But Morningstar also mentions
the increase in employees helping with same store growth and I agree. 

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