I wanted to share some learnings from a brief review of the Fastenal Annual Shareholder Report. This is the 3rd post I’ve done recently that talks about a public company’s annual report. Some of you may be wondering why I’m dragging you through this. It’s a fair question. The reason is that as a shareholder, it is important to know how your company is performing and what its leaders are thinking and planning for the future. A company’s annual report to shareholders is a great way to gain some insight.
But it’s Long
Fastenal’s report is 104 pages.
Let me give you my perspective on reading an annual report.
…and I Don’t Understand a Lot of it
I was an english major in college and spent most of my career in technology and product development. I occasionally needed to do a cost benefit analysis or financial projection, but that is certainly not my strength. A lot of the stuff in an annual report goes over my head.
Commit to 15 Minutes
I take all of my investments seriously. I invest in companies that I believe will beat the S&P 500 index. If I’m not confident, why not just invest in the index? becoming confident means understanding a bit about the company. The annual shareholder report will provide some valuable insight. Open the PDF and take a look. If you do this, you are already ahead of a lot of investors.
Letter From Management
Most start with a letter from the CEO or the board chair. These are usually a page or 2 and provide some insights into the business, the people, and the global economy. The people writing these have insights that you and I could never get. This is a must read (or at least skim). I talked in yesterday’s post about the Berkshire Hathaway letter from Warren Buffett. It is 15 pages and I read it twice. It is as entertaining as it is informative.
Graphs and Pictures
Pictures are always more fun. I look for charts and graphs that compare performance year over year. Sales, cash flow and profits should be growing. A slow year is OK, but be wary of downward trends.
I love this picture in the Fastenal report
This is a lot of information about how the company operates, its people, and business goals. All in one chart.
Locations
I was surprised to see the number of locations. I have never seen a Fastenal store, but apparently there are over 1500 of them. And there are over 1800 onsite locations. What’s an onsite location???
Context
Some quick context on Fastenal. It’s a mid-west US company, founded in 1967 that sells industrial supplies, including fasteners, but also janatorial supplies and everything else an industrial customer needs. Details below if you’re interested.
Fastenal Company, together with its subsidiaries, engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, Mexico, North America, and internationally. It offers fasteners, and related industrial and construction supplies under the Fastenal name.
The company’s fastener products include threaded fasteners, bolts, nuts, screws, studs, and related washers that are used in manufactured products and construction projects, as well as in the maintenance and repair of machines. It also offers miscellaneous supplies and hardware, including pins, machinery keys, concrete anchors, metal framing systems, wire ropes, strut products, rivets, and related accessories.
The company serves the manufacturing market comprising original equipment manufacturers; maintenance, repair, and operations customers; non-residential construction market; farmers, truckers, railroads, mining companies, schools, and retail trades; and oil exploration, production, and refinement companies, as well as federal, state, and local governmental entities. Fastenal Company was founded in 1967 and is headquartered in Winona, Minnesota.
Onsite Locations
I was intrigued about the onsite locations, so I did some research. They have a youtube video, and some info on their website that describe how they provide a custom solution, you guessed it, onsite at the customers location!!! How cool is that? If you go out to buy fasteners, you have lots of choices. You could go to Home Depot or your local hardware store. If you have a hardware store onsite that carries everything you need, organized just for you, where do you think you’re going?
Why Fastenal
I got interested in Fastenal initially as I was thinking about the crumbling US infrastructure and the huge amount of spending that will be required to update roads, bridges, electric grid, etc. This bodes well for boring companies like Fastenal that will benefit from all the companies that will be doing the infrastructure work. I won’t go through my whole thesis, but I found the company interesting, did some research, and decided to make a small investment.
Annual Report
So, let’s bring this back to the annual report. I skimmed the message from the CEO, I saw the cool graphic and I dug into the onsite solutions. I learned something new. I didn’t know this, and what I learned in 30 minutes today made me more committed to this investment. I picked up a few other nuggets from the report, but 30 minutes was time well spent.
One Piece of the Puzzle
I want to be clear that the annual report review is just one piece of the puzzle. See the post on creating a thesis for more details. Before I invest in a business, I look at the opportunity that the business presents, the long-term performance of the business, how the stock price has held up over time, and what the experts say. I read investment reports on my brokerage website, and I look at what the analysts at my favorite investing newsletter have to say.
Experts
There will always be some experts who are bullish on any given company and those that will be bearish on the same company. I’m not necessarily interested in their opinion, but I like to see their analysis and I especially like to see their comparisons to other companies in that same industry. Professional analysts typically follow an industry and all major companies in that industry. They have a unique perspective on how a company is performing v. its peers.
Example
Let’s look at an example. If you were interested in investing in a grocer because you think food is important to people, you may want to look into Kroger. You might be disappointed to learn that Kroger’s profit margin is less than 2%. Chipotle Mexican Grill also sells food and their profit margin is more than 10%.
A research analyst would know that margins in the grocery business are traditionally very small. Huge volume, but small profit margin. This doesn’t make it a bad business, but the research analyst will assess companies that are in the same line of business and assess key metrics like price to earnings, debt level, profits, cash flow… against similar businesses.
Wrap Up
Your investment dollars are important. You want to maximize your gain and feel confident in the businesses in which you invest. The company’s annual shareholder report is an important way to gain insight. Opening the report and spending 15 minutes will be a worthwhile investment of your time. At a minimum, check out the letter from management and year over year trends. Skim through for new and interesting info.
Make sure to utilize other sources in both building your investment thesis and in testing it regularly. The annual report is just one piece.
Hope you enjoyed the read. Let me know what you think.