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Fastenal Company (FAST), W.W. Grainger, Inc. (GWW): The Construction Business Is One of the Best Economic Recovery Plays

With the U.S. economy showing signs of finally producing a sustainable recovery, there are opportunities to be found in some of the companies that produce items that will benefit the most from an improved economy. One area that should tremendously benefit from improving economic fundamentals is the construction industry. An improved economy means more new homes being built, more renovations of existing homes, more commercial construction projects, and more infrastructure projects, such as roads being rebuilt. One of my favorite ways to play this is with Fastenal Company (NASDAQ:FAST), one of the world’s leading manufacturers of fasteners for the construction industry.

Fastenal Company (NASDAQ:FAST)

About Fastenal

Fastenal Company (NASDAQ:FAST) has grown tremendously over its 45-year history and now operates over 2,600 stores in all 50 states and 16 countries around the world. The company’s main products are its line of almost 600,000 different types of threaded fasteners and related accessories.

In addition to fasteners, the company also sells tools and equipment, cutting tool blades, fluid transfer components, welding supply items, and safety equipment, just to name a few. Most of the products sold in the company’s stores are made by other companies. Fastenal’s supplier and customer bases are both extremely diverse, with no one supplier or customer accounting for a significant percentage of the company’s business.

Fastenal has expanded aggressively over the past decade, with revenues more than tripling during that time period:

Looks expensive, but don’t be fooled

At over 33 times last year’s earnings, Fastenal Company (NASDAQ:FAST) seems a bit expensive upon first glance. However, I feel that Fastenal’s growth potential and strong financial position completely justify its valuation. One of the company’s new growth strategies is to put vending machines at customer job sites with various fasteners and other supplies they may need. Since beginning this strategy, Fastenal has over 25,000 vending machines currently in operation, and plans to add another 30,000 this year.

Due to the combination of their new growth initiatives and the continued economic recovery, Fastenal is projected to grow its sales at a double-digit rate going forward. Combined with a renewed emphasis on cost controls which are expected to produce wider margins, Fastenal is expected to grow its profits at a very impressive pace. For 2013, Fastenal is projected to earn $1.59 per share, rising to $1.85 and $2.14 in 2014 and 2015, respectively. This translates to a three year average forward earnings growth rate of 14.7%. The combination of this with Fastenal’s excellent balance sheet with no long-term debt whatsoever leads me to think that shares are still very reasonably valued.