Streetwise

Lauren Rudd

Sunday, March 17, 2013

No Shortage of Crises

The world has no shortage of crises. No sooner does one come to an end than another arises. Yet, maintaining a pragmatic vista does not imply any lesser degree of concern. You simply 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 paraphrase 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 began writing about last year after a hiatus of 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.

When I wrote about the Company a year ago, the shares were trading at $88.29. My earnings estimate for 2012 was $3.39 per share with a 12-month price target of $96, yielding a potential 8.7 percent capital gain. So what was the net result? Earnings for 2012 came in at $3.80 and the shares recently closed at 102.79. 

Looking at the Company’s 2012 performance, sales rose 10.2 percent over the prior year. However, same-store sales (stores open over a year) only increased 5.3 percent, as compared to an 8.2 percent increase in 2011. 

To the company’s credit, its gross margin rose to 33.6 percent from 33.2 percent. Selling, general and administrative expenses (SG&A), including depreciation and amortization, improved to 24.2 percent of sales, as compared to 24.9 percent in 2011. Meanwhile, the Company opened 93 new stores and closed two during 2012, as compared to 85 new openings and one closure during 2011.

In its forward looking guidance, Tractor Supply expects 2013 sales of between $5.07 and $5.17 billion, with same-store sales expected to increase 3 to 5 percent.  Earnings are projected at $4.32 to $4.40 per share, which includes estimated costs of $0.06 to $0.07 per share associated with the relocation of its Southeast distribution center and its corporate data center.  For the full year, the Company expects capital expenditures to range between $240 million and $250 million.

The intrinsic value of the shares using a discounted earnings methodology is $140, while the more conservative free cash flow to the firm model yields an intrinsic value of $139. Rarely do the two intrinsic value methodologies match so closely. As previously mentioned, the shares recently closed at $104.05.