Initiating Fastenal At Neutral

We have initiated coverage on Fastenal Co. (NASDAQ:FAST) with a Neutral recommendation and a target price of $45.
 
Founded in 1967 and based in Winona, Minnesota, Fastenal is a leading national distributor of industrial and construction supplies and has 2,369 stores in Canada, Mexico, the Dominican Republic, Puerto Rico, Singapore, China and all 50 states in the U.S.
 
Fastenal continues to upgrade its inventory management system, initially known as Customer Service Project (CSP), to sell and expand its array of products to the existing and new customer segments. This effort has been well supported by the company’s widespread customer base that belongs to varied markets, which in turn, protects its market position in the economic downtrend.
 
Fastenal’s strong cash flow has helped it to increase its fourth quarter dividend by 14% to 40 cents per share, compared to the first quarter of 2009, besides repurchasing shares.
 
However, the weakened economy continues to affect Fastenal, primarily in the industrial production and non-residential construction businesses. In 2009, sales to manufacturing customers contracted 18.8% and to non-residential construction reduced 25%. Further, the company’s near-term profitability has been adversely affected by the slow profit generation from its newly opened stores.
 
Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market.

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