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Fastenal Upgraded to Neutral

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We recently upgraded our recommendation on Fastenal Company (FAST - Free Report) to Neutral following decent third quarter results, an improvement from the weak second quarter performance.

In line with expectations, Fastenal Company’s third quarter 2012 earnings of 37 cents per share grew 12.1% year over year, attributable to 12.2% year-over-year revenue growth. The second quarter was very weak for Fastenal in terms of sales growth. However, the company is now seeing some improvement in demand. The construction market has somewhat bounced back while the manufacturing market has remained almost consistent. The company is also seeing some progress around its vending program (FAST Solutions). The daily sales growth rates declined in the second and third quarters due to uncertainty in the growth outlook of Fastenal’s end markets. However, daily sales re-accelerated in September, which is an encouraging sign. Further, though fastener sales have been weak since the past few quarters, management has plans to re-invigorate fastener sales in 2013.

Fastenal has adopted FAST Solutions, an industrial vending process that has the potential to revolutionize the industrial distribution system and to increase profitability. The company installs vending machines at a customer’s location and keeps it filled with products they need. These vending machines inform the customer what and how they are using these products, which subsequently results in controlling the customer’s inventory and administrative cost while reducing product consumption. Fastenal is fast accelerating its vending contract signings and installations.

We are also encouraged by Fastenal’s numerous growth drivers like government business and metalworking. Fastenal has increased focus on metal working products, which has begun to show progress. In fact, the company is looking forward to offer its metal work supplies to other companies. Fastenal’s service business, Fastenal Manufacturing, reworks on fasteners as well as makes many specialized part from exotic materials for specific purposes. Fastenal intends to be more involved in government business and currently has 31 government contracts in hand. Its metalworking and government business are growing 10% faster than company averages. The company’s internet business is also improving. The company has also built a national accounts team, which is dedicated to servicing corporate customers and signed 186 new national account customers in 2011. These initiatives are gaining traction and will help to achieve future profitability.

Other than that, the company’s strategy of new store openings will pave the way for future growth. Fastenal carries a Zacks #3 Rank (a short term ‘Hold’ rating) and competes with The Home Depot, Inc (HD - Free Report) and Lowe’s Companies Inc. (LOW - Free Report) .

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