Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Tractor Supply (TSCO) continue their impressive long term upward trend closing the day 6% higher at $98 after the company provided the market with a favorable update.

First Quarter Update

Tractor Supply, the nation's largest retailer of farm stores reported first quarter revenue of $1.02 billion, up 22% on the year, which marks the first quarter in the history of the company in which it surpassed the $1 billion revenue mark. Adjusting for the fact that the fiscal year had 53 working weeks, same store sales growth came in at 7.6%

The firm is still calculating its final net income figures for the quarter but it expects earnings per share to come in at between $0.53 and $0.55. The warm weather, marked an early start of the spring season, which resulted in a favorable earnings impact of between $0.09 and $0.11 per share. This same warm weather had a slight negative impact on gross margins during the quarter as winter items were marked down.

Outlook

While the early spring had favorable consequences for the first quarter results, it will have a somewhat depressing effect on the second quarter. Despite an early spring, CEO Wright believes that for the remainder of 2012 the company has "the right product and marketing plans in place to maintain customer engagement and drive continued profitable growth". On the back of the strong first quarter the company raised its full year 2012 targets. It now expects to generate between $4.61-$4.68 billion in revenue, same store sales growth of 4.0-5.5% and net income between $260-$265 million.

Valuation

The company ended its fiscal year of 2011 with $175 million in cash at hand, and it operates without debt. After today's rally the market values the company at $7 billion, subtracting the net cash position leaves a valuation of roughly $6.8 billion for the operating assets.

As such the market values the company 1.4 times annual revenues and 30 times earnings. A quarterly dividend of $0.12 provides for a "mere" 0.5% dividend yield.

Investment Thesis

Tractor Supply has been trading in a $15-$25 range for most of the decade, until shares broke out of their trading range by the end of 2009, marking the start of a prolonged rally towards levels of $98 at the moment.

Shares have been driven by increased revenue growth year on year and continuing margin expansion which led earnings to double within a three year period. With the increase in growth rates, valuation multiples have grown as well. The valuation is getting somewhat stretched although the price earnings ratio is expected to fall towards 26 times 2012's earnings.

While I can easily envision shares breaking above the $100 mark, and wish all the best for the current long term shareholders, Tractor Supply is getting to expensive to still get in, as margin expansion and revenue growth cannot continue indefinitely.

Source: Tractor Supply: On Its Way To Breach $100?