Fastenal Company

This is our first report on Fastenal, a major wholesale distributor of industrial and construction supplies. The company delivered a strong performance in the last quarter surpassing Wall Street expectations in terms of revenues as well as earnings. It saw a 16% sales growth which resulted in a 19% increase in operating profit. Even though several commodity indexes have lately dropped from their heights, there are still many products in the global supply chains whose prices still reflect the higher commodities from a few months ago. It will take several quarters for lower-cost items to reach the point of use, and supplier letters requesting reimbursement for these expenditures are still being sent out. These factors have supported the marketplace’s consistent product pricing levels. Other operating expenditures were also leveraged, with lower bad debt costs, lower general insurance costs, and greater asset sales only partially offsetting higher selling-related transportation costs that were mostly driven by rising fuel prices. Furthermore, while the supply chain has improved, allowing them to shorten domestic and import ordering cycles, the team slowed down their inventory build since product availability in their hubs has achieved their target level. These elements ought to increase cash conversion rates going forward. We initiate coverage on the stock of Fastenal Company with a ‘Hold’ rating.