Tractor Supply (TSCO) - $34.59 on NASDAQ on January 29, 2009
52 week price range: $47.50 - 26.70
Diluted shares: 36.8 million
Market cap: $1,273 million
Debt: $2 million
Enterprise value: $1,275 million
Tractor Supply is the largest operator of retail farm and ranch stores in the United States. The company is focused on supplying the product needs of recreational farmers and ranchers as well as other consumers, who enjoy the rural lifestyle. Stores are primarily located in communities away from large metropolitan areas. Most of the company’s current stores are located in the eastern half of the country along with a relatively small number of stores in the Pacific coast states.
Historically, the company has generated rapid profitable growth. For the five year period from 2003 to 2008 store count at year end grew from 463 to 855, and EPS grew from $1.38 to $2.19. This is a compound annual growth rate in EPS of 9.7%.
Management has identified over 1,400 markets for Tractor Supply stores, which include current store locations, and they anticipate an annual increase in store count of approximately 13%. Planned growth in 2009 is a little slower at 75 new stores, which would be an annual increase of about 9%. However, more rapid growth should resume thereafter.
In my income model, store count increases from 855 at the end of 2008 to 1,480 at the end of 2013. Over this five year period, I estimate that EPS will grow from $2.19 in 2008 to $7.34 in 2013. This would be a compound annual growth rate in EPS of 27.4%.
Tractor Supply has been successful by pursuing a focus strategy that differentiates itself from its competitors. The company focuses on a very specific market niche, i.e. consumers in rural America, and offers a unique assortment of products to meet their needs. Product categories include pet and animal products, seasonal products including lawn and garden power equipment, hardware and tools, work/recreational clothing and footwear, truck and towing products, and other agricultural products. With this particular product mix the company faces relatively limited and highly fragmented competition in serving its target customers. Consequently, the company can consistently generate a financial return that exceeds its cost of capital.
While Tractor Supply is not immune from the current negative macroeconomic trends, the company continues to generate good financial results. The stock is trading at 12.8 times estimated EPS of $2.70 for 2009. This is a low valuation multiple for a nearly debt free company, that I believe can grow earnings at a compound annual rate of about 27% for the next five years. My estimate of fair value based on a discounted cash flow model is $54.50 per share. As a point of reference the all-time high for Tractor Supply was $67.59 per share in March 2006.
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