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Fastenal Company (FAST): Wedgewood Capital Views Company as ‘High-Quality Growth Business’

Wedgewood Capital is bullish on Fastenal Company (NASDAQ:FAST), a Minnesota-based firm engaged in the wholesale distribution of industrial and construction supplies. The fund views the firm as “a high-quality growth business” that is benefitting from the long-term renaissance in U.S. manufacturing and energy production. At the same time, the fund believes that Fastenal is gaining a share in the highly-fragmented industry from a variety of competitors.

Fastenal Company (NASDAQ:FAST) is a popular stock among hedge funds tracked by Insider Monkey. At the end of the second quarter this year, 28 funds held shares of Fastenal, compared to 22 funds at the end of the first quarter, according to our database.

During the third quarter, Wedgewood Capital upped its stake in Fastenal, among others. The investor discussed its investment thesis on Fastenal and seven other stocks in its 2017 Q3 investor letter (you can download a copy here). We’ve already covered Wedgewood’s investment theory on Alphabet and Cognizant Technology Solutions in other articles.

Suwin/Shutterstock.com

Suwin/Shutterstock.com

Here is what Wedgewood Capital said about Fastenal Company (NASDAQ:FAST):

Since we first bought Fastenal at the end of October last year, the U.S. manufacturing and energy industries have transitioned from approximately two years of recessionary conditions to a healthy recovery, driven in large part by a rebound in U.S. energy production. In fact, we note that the Institute for Supply Management’s Purchasing Managers Index – a widely-used gauge of manufacturing activity – just hit a 6-year high in September, with the component of the index representing actual production hitting its highest level in 13 years. Fastenal’s own results have moved from declining revenues and operating margins to double-digit percentage revenue growth and improving operating margins.

Aside from an aggressive run in the stock for a brief period after the U.S. presidential election, Fastenal’s stock has barely noticed the significant recovery in both the end markets and the Company’s results, leaving valuations still near 2009’s recessionary lows. Persistent noise about potential disruption to the industry from Amazon has weighed on the stock to some degree; we note that Amazon is actually Fastenal’s largest vending customer, meaning that Fastenal clearly can offer value that Amazon is not able to provide itself. This highlights, again, that the strategies used by the Company for decades to differentiate its business model versus traditional competitors are the same strategies that differentiate its business versus online competition: specifically, Fastenal has people, products, branches, and a local delivery fleet on the ground as close to the customer as possible – in fact, in many cases, Fastenal is managing a customer’s inventory right on the customer’s factory floor. We continue to view Fastenal as a high-quality growth business, benefitting from the continuing long-term renaissance in U.S. manufacturing and energy production, while gaining share in this highly fragmented industry from a variety of competitors who are unable to offer the services Fastenal provides. We believe this is a great example of the sort of investment opportunity that occasionally will be tossed up by an exceptionally narrow market. In Fastenal, we have a company and its end markets involved in the creation of real products, real profits, and real cash flows, which create real economic value for stakeholders and for the economy as a whole.

Fastenal Company (NASDAQ:FAST) performed well in the third quarter. The company reported a year-over-year increase of 11.8% in net sales to $1.13 billion. Its net earnings for the third quarter were $143.1 million, representing a 12.7% increase compared to the same quarter last year. Earnings per share were $0.50 versus $0.44 for the third quarter of 2016. The company’s stock performance also looks well. Shares of Fastenal Company (NASDAQ:FAST) are up 3% so far this year, while the stock has increased more than 26% during the last 12 months.

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