Merrill McHenry...'s  Instablog

Merrill McHenry, CFA
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30 Yr multi-sector veteran Stock Analyst and former US$1.75B Portfolio Manager, etc.; having “worked both sides of the Street and somehow retained an eye for value and skepticism.” (the late great Alan Ableson in Barrons).
My company:
235 Capital Partners
  • Spoiled "Salad Days" For Tractor Supply? 0 comments
    Feb 13, 2014 7:19 PM | about stocks: TSCO

    TSCO management put on a brave face for the recent conference call, but the constructive spin they put on lowered forward guidance and the new "Farm Bill" I believe doesn't add up.

    Beginning with the lowered guidance and management's assertion that their take on the farm bit is "no effect" on them I believe is very incorrect. Perhaps a bit of it was baked into reduced forward guidance - perhaps not and it should be, as I find it a major strike across TSCO's bow.

    Management likes to say we're in the "rural lifestyle - not farm business". I don't believe the two unrelated. Both the "rural lifestyle" and rural communities are supported by the rural economy - and the rural economy is facing 2 major headwinds this year,

    1.)The new "Farm Bill" ENDS $4.5 billion in RURAL "Direct Subsidies" that was paid whether or not a crop was planted. A straight up $4.5 billion giveaway. Don't tell me a materially amount of the freebie doesn't make its way to TSCO. Previously, a farmer didn't even have to plant a crop to get free handout check. With only 2% of America's population on farms that works out to an average $7,168 in free disposable rural income per farmer. (Now they will at least have to go through the expense of planting and growing a crop, then losing it and collecting crop insurance before collecting taxpayer money.) This bill will be signed into law 2/14/14. End of that free rural money.

    2.)With lower corn and grain prices the U.S. Department of Agriculture on Tuesday projected that American farm incomes are likely to plunge 27% this year from 2013 to $95.8 billion, the lowest level since 2010. That's a hit of $41,201 per farm.

    Combined the hit to farm income I approximately $48,369. Some of which, and even more via a rural community multiplier effect, would otherwise find its way to TSCO. It clearly seems to me that even "recreational farmers" will share in this hit to what would otherwise be disposable income.

    3.)Or, take Deere's Farm Income (78% of sales - includes "rural lifestyle" riding mowers and turf equipment) decline estimates from yesterday's 2014 estimates. Deere stated it expects its farm income to decline 6% this year.

    Of note, today Cabelas reported disappointing sales (-10.1%)and near term guidance. No "rural lifestyle" customers there??

    I grew up in rural Kansas and know about the farm and rural economy. Money, and the rural economy pivot from the farmer, to local dinner and stores upward. Urban people don't habitually come out to the rural economy to support it. If anything, it's the other way around. Let's face it, the "rural lifestyle" is dependent on rural discretionary income - and that will be facing severe headwinds going forward. Look at TSCO shares in the last 2009-2010 lean farm years - flat to down. Don't tell me TSCO doesn't farm from its own back yard.

    Stocks: TSCO
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