Streetwise

Lauren Rudd

Sunday, March 23, 2014

Till Your Investments with Tractor Supply

If you are glancing up to see if the sky is falling as a result of listening to the soothsayers of doom, consider that a funny thing happens on the way to Wall Street...stocks over time outperform other investments.

As I have explained repeatedly, the key reason for share price performance is that businesses retain earnings, which they reinvest to generate additional earnings and dividends. Driving it all is the basic theory of compounding. This was pointed out as far back as 1924 with the publication of a slim little book titled “Common Stock as Long Term Investments,” written by Edgar Lawrence Smith.

Legendary economist John Maynard Keynes, in reviewing the book, was quick to delineate that most important point. Yet, it is no secret that the investment playing field is not always level, as the Street has always been driven by greed and a liberal interpretation of what denotes fair play. However, you should never view the Street’s antics as an impediment.

For example, you might want to research Tractor Supply (TSCO), the largest operator of farm and ranch stores. The retail giant has a unique market niche in that it serves the lifestyle needs of recreational farmers and ranchers. TSCO recently revamped itself by concentrating on square footage growth and maximizing productivity from its existing store base.

At the same time, the Company implemented significant changes in its store operations to make them simpler and more customer-friendly. Those initiatives will likely increase store traffic and subsequently sales.

When I last wrote about the TSCO a year ago my earnings estimate was $2.25 per share, with a 12-month projected share price of $59. So how did the Company do? Earnings for 2013 came in at $2.32, while the shares recently traded at $74.01. All references to per share amounts reflect a two-for-one stock split effective September 26, 2013.

Looking at the Company’s fiscal 2013 performance, sales increased 10.7 percent while comparable store sales increased 4.8 percent when compared to fiscal 2012. Gross profit was up 12.0 percent, while gross margin increased to 34.0 percent of sales, up from 33.6 percent of sales in fiscal 2012.

Selling, general and administrative expenses (SG&A), including depreciation and amortization, improved as a percent of sales, coming in at 24.0 percent, as compared to 24.2 percent for fiscal 2012. At the same time, net income increased 18.7 percent with net income per share increasing by 22.1 percent to $2.32 from $1.90 for fiscal 2012.

During fiscal 2013, the Company opened 102 new stores and closed two stores compared to 93 new store openings and two store closures during fiscal 2012.

In its guidance going forward, Tractor Supply is anticipating sales of between $5.62 billion and $5.70 billion, with comparable store sales expected to increase between 2.5 and 4.0 percent. The Company is projecting net income of between $2.54 and $2.62 per share, while capital expenditures are expected to range between $240 million and $250 million, including spending to support 102 to 106 new store openings and construction of a new Store Support Center to open in 2014.

Keep in mind that Tractor Supply is on a path of controlled growth. Even with more than 100 stores coming online this year SG&A expenses are expected to remain virtually unchanged. The company is also consolidating its support facilities at the corporate level, leading to lower occupancy costs.

While the Street may have wanted a little more out of Tractor Supply's 2014 guidance, the Company is looking to the future as agricultural needs will only increase year after year. It's not a cheap stock, but Tractor Supply has planted the seeds for attractive long-term growth.

The intrinsic value of the shares using a discounted earnings methodology is $99, while the more conservative free cash flow to the firm model yields an intrinsic value of $152. My earnings estimate for 2014 is $2.65 per share with a 12-month price target price of $85, yielding a potential 15 percent capital gain. There is also a 0.70 percent dividend yield.