Streetwise

Lauren Rudd

Sunday, March 18, 2012

A Rout of Sellers Means It Is Time To Go Shopping

The world has no shortage of crises. No sooner does one come to an end than another arises. However, maintaining a pragmatic vista does not imply any lesser degree of sympathy for those who are imperiled. Rather you merely want to avail yourself of the opportunities created by any irrational and uncalled for panic flows of capital. To put it bluntly, the best time to go shopping is when there is a rout of sellers looking for the exits.

Therefore, as we approach the second quarter of the year, you want to position yourself to take advantage of bargains created by market unrest. Yes, market volatility, combined with a fear of the unknown, readily foments paranoia, while at the same time creating profitable investment opportunities. Nonetheless, a panic by others does not negate or relieve you of the responsibility for carrying out the required degree of research and analysis.

Successful investing in any market is all about uncovering underpriced fundamental value. Ignore the foreseers of doom, treat fundamental value as a religious doctrine and concentrate your research on companies whose past performance is one of growth and increased earnings.

Although continually adding to a portfolio of quality stocks will increase your wealth and financial security over time, do not ask for the impossible. To be desirous of “beating the market” or making a “killing” is to fall victim to greed, and greed, to use a quote from the Star Wars epics, is the dark side.

Furthermore, the time to do your research is now and not 20 minutes before you decide to place a buy order. You will need to have at hand a researched list of investment candidates, detailing a price for each that in your mind constitutes value. Furthermore, your primary investment objective should always be to achieve a reasonable return that is in excess of what you will lose through taxes and inflation.

For example, one potential investment candidate you might consider and one that I have not written about for several years is Tractor Supply (TSCO). Tractor Supply's stores are focused on meeting the requirements of recreational farmers and ranchers, as well as tradesmen and small businesses with stores that are located primarily in outlying areas of major metropolitan markets.

Looking at the Company’s 2011 performance, sales increased 16.3 percent to $4.23 billion when compared to a year ago, while same-store sales increased by 8.2 percent.  The Company’s gross margin rose 16.9 percent to $1.41 billion, or 33.2 percent of sales, as compared to $1.20 billion, or 33.1 percent of sales for fiscal 2010. 

Selling, general and administrative expenses, including depreciation and amortization, increased 12.5 percent to $1.05 billion, or 24.9 percent of sales, as compared to 25.8 percent of sales in 2010. 

Meanwhile, net income for the year was $222.7 million, or $3.01 per share, as compared to $2.25 per share in 2010.  However, the Company estimates that the 53rd week in 2011 added about $0.09 per share.

Building on its 2011 momentum, the Company has increased its long-term operating margin target to 9.5 percent from 8.5 percent as compared to 8.3 percent in 2011. Operating margin is the ratio of operating income divided by net sales, where operating income is simply the difference between revenues and expenses.

Tractor Supply also increased its estimated domestic store growth potential to 2,100 stores from a previously estimated 1,800 stores. In its forward looking guidance, management anticipates net sales for fiscal 2012 will range between $4.56 billion and $4.66 billion, with same-store sales expected to increase 3 to 5 percent, while projecting net income of $3.38 to $3.46 per share.

The intrinsic value of the shares using a discounted earnings methodology is $100, while the more conservative free cash flow to the firm model yields an intrinsic value of $125. The shares recently closed at $88.29.

My earnings estimate for 2012 is $3.39 per share with a 12-month price target on the shares of $96, yielding a potential 8.7 percent capital gain. There is also a 0.50 percent dividend yield.