Since we first bought Fastenal (NASDAQ:FAST) 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.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter shareholder letter.