Tickers in this Article: FAST, MMM, EMR, JEC, SHAW
Fastenal (Nasdaq:FAST) kicked off its first quarter with double-digit sales and earnings growth as its industrial and construction client base continued to see higher activity following a severe recession. It sells products, including nuts, bolts and fasteners, that go into industrial products, equipment, and facilities through retail and wholesale channels, both of which are showing robust trends. The stock has also recovered from lows reached in March 2009 but may now have run too far.

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First Quarter Recap
Net sales jumped 23% to $640.6 million as Fastenal opened 37 new stores and experienced a continued top-line recovery at its existing store base. The company stated that sales trends from industrial production clients, where it supplies products that become a part of finished goods, were more pronounced than in the maintenance manufacturing business where it supplies products that go into maintaining facilities or equipment. Industrial production includes companies such as 3M (NYSE:MMM) and Emerson Electric (NYSE:EMR) while engineering and construction firms including Jacobs Engineering (NYSE:JEC) or Shaw Group (NYSE:SHAW) could use Fastenal for products to maintain manufacturing facilities. Sales to the nonresidential construction industry were also strong, jumping 17.7% to continue a recovery in sales that started in the fourth quarter of 2009.

Lower sales costs boosted gross profits by 25.4% to $333.4 million. Operating and administrative cost growth of 16.7% was also held below sales growth and helped push operating income up by 42.3% to $128.7 million. The improvement in net income was almost as strong at 42% as earnings reached $79.5 million, or 54 cents per diluted share to come in ahead of analyst projections. Higher levels of capital expenditure sent cash levels down by 13%.

For the full year, analysts currently project sales growth in excess of 16% and total sales of just over $2.6 billion. The current consensus earnings figure is $2.25 per share, which would represent year-over-year growth of 25%.

Bottom Line
After a severe dip in its business when sales and earnings fell by double digits, Fastenal is seeing a solid recovery in its operations. This is a direct result of a shift in strategy that began in 2007 before the recession hit and resulted in relying less on new stores to drive sales and more on sales professional outside of its stores. This has led to sales closer to the customer and has also allowed for a more variable cost structure that rises and falls along with the top line.

Results should continue improving throughout 2011, but at a forward earnings multiple of nearly 24, a significant amount of future growth is already priced into the stock. (Find out how average investors are breaking into what was once reserved for the ultra rich. Check out Hedge Funds Go Retail.)

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