Is Tractor Supply Co. Finally Cheap Enough

Tractor Supply (TSCO) July 1, 2008 : $28.50 (9:45 AM price)
52-week range: $28.01 [Jan. 22, 2008] – $53.55 [Aug. 8, 2007]

Recreational farming and ranching has been booming in suburban and rural areas of America. Tractor supply serves this market with livestock and pet products, hardware, tools, snow blowers, mowers and other products. Following the acquisition of a competitor in 2002, sales and earning grew dramatically. 2007 saw all-time records in every category yet today's poor economy has caused TSCO shares to plummet by 58% from an March 2006 high of $67.60 to just $28.50 currently.

Here are the per share numbers* since 2002:

Year …... Sales ….. Cash Flow ….. Earnings ….. Avg. P/E …. Book Value

2007 …. $72.12 …… $3.93 ……….$2.40 ……… 19.9x ………$15.08

2006 …. $58.83 …… $3.31 ……….$2.22 ……… 23.8x ………$14.87

2005 …. $52.44 …… $3.04 ……….$2.09 ……… 22.3x ………$12.11

2004 …. $45.40 …… $2.38 ……….$1.57 ……… 24.1x …….... $9.68

2003 …. $39.39 …… $2.09 ……….$1.45 ……… 19.3x ……… $7.90

2002 …. $33.18 …… $1.51 ……….$0.99 ……… 15.2x ……… $6.25

* sources: Value Line and MSN Money Central

Tractor Supply management is guiding to a range of $2.54 - $2.62 but Value Line and Zacks are taking a more conservative stance with 2008 estimates of $2.45 and $2.51 respectively.

Even the lower estimate makes TSCO's multiple just 11.7x this year's and 10x 2009's expected earnings. Compare those to their historical P/Es in the chart above. The price/book value and price/sales are now at levels last seen during 2001's recession. Investors who purchased during that last recession saw their shares go from a split-adjusted $2.10/share to $44.90 before the end of 2003.

Debt is low at just 16% of capital and with total interest coverage of 19x last year. Value Line awards TSCO an "A+" financial strength rating.

Despite all the positive factors these shares are now offered for a share price that is lower than the lows touched for even one day from July 2003 right through year-end 2007.

Some well known holders [as of March 31, 2008]:

Capital Research and Mgt. …………….... 11.30%

Resources ………………...….. .................5.99%

AMCAP Fund ……………………………….. 6.76%

Southern Sun Asset Mgt. ……………………. 4.34%

Thomas W. Smith …………………………… 4.09%

Barclays Global Inv. ……………………….... 3.21%

Neuberger Berman, LLC ……………………. 3.11%

Vanguard Group …………………………….. 2.88%

Gates (Bill and Melinda) Foundation ……….. 2.68%

Officers and Directors owned ……………….12.90%

What would be a reasonable target price for Tractor Supply by year-end 2009? Even a lower than typical 16 multiple on the 2009 estimate of $2.85 leads me to a goal of $45.60 or up 60% from today's quote.

Is that achievable? TSCO shares hit peak prices of $44.90 - $67.60 as some point in each calendar year from 2003 – 2007 when fundamentals were well below where they are now.

Let's hope these shares do well as Bill and Melinda may need the money.

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If you like Tractor Supply but want a lower risk play… consider this:

…………………...… Cash Outlay .............................………….. Cash Inflow

Buy 1000 TSCO @ $28.50 …………. $28,500

Sell 10 Jan. 2010 $30 Calls @ $6.10 ………………………………… $6,100

Sell 10 Jan. 2010 $30 Puts @ $5.90 …………………………………. $5,900

Net Cash Outlay ……………………….. $16,500

If TSCO shares are above $30 ( up 5.3% from our starting point) on expiration date in January 2010:

• Your shares will be called (sold) for $30,000.
• Your puts will expire worthless (a good thing for you as a seller).
• You will have no further option obligations.
• You will own no shares.
• You will have $30,000 for your cash outlay of $16,500.

That's + 81.8% profit [cash-on-cash] in just about 19 months on shares that need only be 5.3% higher than when the position was initiated.

Risk?

• Break-even on the shares is your $28.50 cost less the $6.10 call premium = $22.40 /share.
• Break-even on the puts is the $30 strike price less the $5.90 put premium = $24.10 /share.

In a worst case scenario you would be forced to own 2000 shares of TSCO at an average net cost of $23.25 /share. That means these shares could drop > 18% from your starting price without incurring a loss.

Disclosure: Author owns shares and is short options on TSCO.

Comments

[borisb]

are you on drugs? Oil has destroyed the boom.

[granger]

I agree 100%. I have been a lng term holder. Recently, under 30, I have aggressively expanded my holding. I am rarely aggressive, but when I see value, especially in what I view as a solid growth story, I go after it.

I am a long term holder. See you all in 10 years much higher. I am keeping all of my shares.

Just my opinion.

[blink0404]

as the market continues to go down, agriculture, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

[granger]

Thanks for the podcast.

[TollBooth]

This company traditionally pulls thru recessions/bear markets. The unique product mix holds it above water. Customers may pull back on ATVs and birdbaths, but they will still buy horse feed, dog food, hydraulic fluid and fencing supplies. This is not Home Depot, or Wal Mart, and the customer is not row cropping soybeans on 2,000 acres.