Tractor Supply: A Bargain 'Out Here'

I initiated a position in Tractor Supply Co. (TSCO), a 70 year old niche retailer that I have watched for a long time but never owned due to valuation. As the company says, they support the lifestyle "out here". Their typical client has a small farm, pets, horses, and pickups. In many cases they have migrated from urban areas to adopt the rural lifestyle, a trend that has shown attractive growth.

Tractor Supply caters to the hobby farmer with a unique mix of merchandise including pet and livestock feed, medicines and supplies, farm equipment, welding equipment, outdoor apparel, trailers, truck boxes, etc. Their merchandise mix is quite different than that found in big-box home stores or hardware stores, and creates a destination retailer for small farmers. About a third of their sales come from the pet and animal category.

With only about 700 stores concentrated in the eastern half of the country, they have plenty of room for growth. They plan on growing the store count at about a low-teens rate. Add to this a few percentage points in comp sales growth, and some operating leverage and share buybacks and I can easily see eps growth approaching 20%. Over the past five years they have shown growth above 20%. Additional potential upside comes from increasing their private label product assortment and increasing direct overseas product sourcing.

TSCO's results have been hit lately by strange weather including wide-scale drought and a warm fall. This is one retailer where you can believe them when they blame it on the weather. They have also seen a reduction in big ticket items, a common malady for retailers these days. I don't believe that any of these factors are permanent, and I am happy to own this at a mid-teens multiple (low teens on next year's earnings) whereas it has historically traded > 20x.

Add up improving sales trends, better margins, and multiple expansion and I think you have the makings of a winning investment "out here".

Disclosure: Long TSCO