Tickers in this Article: FAST, TSCO, LL, SSD
Despite increasing profits by nearly 60% in the quarter and beating analyst expectations, Fastenal (Nasdaq:FAST) shares declined on the news. In an economy where companies have been able to squeeze profits despite declining sales, Fastenal didn't have to in the quarter. Third-quarter sales were actually up 23% quarter over quarter.

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A Victim of Its Own Success
Across the board, Fastenal had a quarter that all businesses would love to produce. The company has opened 90 stores so far in 2010 and they have all performed strongly thus far. To be sure, the company's strong quarter is in response to the weakened 2009 year which was plagued by a recession.

Aside from the recession, Fastenal has had an unblemished record of sales and profit growth for over a decade. Investors don't seem to have missed this fact. While earnings grew to $75 million in quarter from $48 million a year ago, the company sports a market cap of nearly $8 billion which implies a forward earnings multiple of nearly 30 times earnings if you annualize the third quarter earnings figure. That seems a bit of stretch despite the quality that this company possesses. Quality retailers like Tractor Supply (Nasdaq:TSCO) and Lumber Liquidators (NYSE:LL), both of which have excellent future growth potential trade at under 20 times forward earnings, respectively.

Tough As Nails
With under 2,400 stores, the market still holds growth potential for Fastenal in terms of adding new stores. The company has stores located in the U.S., Canada, China, Mexico and Singapore among others. Selling basic construction supplies like nails, nut, and screws, you can imagine how many stores could exist in places like China and Mexico.

Given the excellent management behind Fastenal's success, they will likely deliver. But at its current valuation, Fastenal remains of the most expensive amongst its peers. While the company's operational performance clearly warrants a premium valuation, a current P/E of 40 is quite high. On the other hand, Simpson Manufacturing (NYSE:SSD) commands a P/E of nearly 50 times trailing earnings. (For more, see Getting On The Right Side Of The P/E Ratio Trend.)

Relative My Dear Market
Depending on what comparables you choose, Fastenal's current valuation make look grossly overvalued or just another case of growth at an attractive price type investment. One thing is certain: if the company's continued recovery from the recession is similar to that in the third quarter, valuation might not matter much. (For more, see Fastenal Moving Too Fast.)

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