Tickers in this Article: FAST, GWW, HD, WCC, AXE, HWCC, DXPE
If the economy really is teetering into a recession again, it is despite relatively encouraging rail traffic numbers and fairly strong sales trends at industrial suppliers. While Fastenal (Nasdaq:FAST) is unquestionably tied to trends in GDP and industrial activity, investors who overlook the consolidation and market share growth potential of this name do so at their own risk.

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Earnings Still Growing at a Fast Pace
Fastenal has more than one wind at its back, and the company has translated this into very solid growth during this economic recovery. For the third quarter, revenue grew 20% and slightly exceeded analyst expectations - a performance all the more impressive as the company routinely reports monthly sales figures. That said, there was some growth deceleration in September (growth was below 19% year on year), so investors should assume that analysts on the wrong side of this story will try to use that tidbit to validate continued pessimism.

Margin performance and earnings growth were also quite strong. Gross margin improved just a bit (10 basis points), but that is not a bad result in an economy where seemingly everyone is paying more for everything. Although the company did not discuss the contributions of private label sales in its earnings report (odd, given the level of detail the company provides), that should be an ongoing positive factor. Operating income was also strong - growing 29% on a roughly 140-basis-point improvement in operating margin. (For related reading, see A Look At Corporate Profit Margins.)

Still a Huge Runway
Fastenal has been a rather remarkable industrial growth story over the past decade, and the company has nearly 2,600 stores open across the country. That sounds like a lot (and it is), but there are plenty of communities that can support still more locations. What's more, Fastenal management thinks that it has only about 2% of the industrial supply market (and the giant of the group, Grainger (NYSE:GWW) has about 5%), so there is plenty of room to grow in North America - let alone the world.

At the same time, the company is not merely trotting out the same ideas year after year. While the company distributes products from companies like Illinois Tool Works (NYSE:ITW), Lincoln Electric (Nasdaq:LECO) and Newell Rubbermaid (NYSE:NWL), it also has its aforementioned line of private label products. The company is also having good success in rolling out its industrial vending machines - though in some cases these machines are arguably a little too successful in helping companies reduce their component needs.

Consolidation and Competition
The industrial distribution industry is massively fragmented; forget Snow White and the Seven Dwarfs, it's more like a couple of Snow Whites and hundreds of dwarfs. That said, it is a market that punishes reckless M&A - Home Depot (NYSE:HD) tried to make a big splash by consolidating companies and ended up leaving the market with its tail betwixt its legs not so long after.

Increasingly, it seems like this is a market that rewards a certain mix of specialization and general service. WESCO (NYSE:WCC), for instance, focuses on the electrical side of things while Anixter (NYSE:AXE) and Houston Wire & Cable (Nasdaq:HWCC) are better known for wiring in cabling. In all cases, though, the companies do more than "just" that, and Anixter has been expanding its fasteners business. And then you also have to consider more traditional MRO companies like DXP Enterprises (Nasdaq:DXPE), who are trying to establish their own niche in this large market.

The Bottom Line
Fastenal does not look cheap now, but then arguably it did not look all that cheap a year ago when the stock was about 30% lower. Investors have shown time and time again that they will pay for good growth stories and Fastenal remains a very interesting growth story. Although it is hard to recommend chasing this stock, particularly with the present fears of an economic slowdown, this is a stock that belongs on a GARP investor's watchlist and would certainly be worth purchase on a pullback. (For related reading on GARP, see 5 Must-Have Metrics For Value Investors.)

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