Tractor Supply: Buy Online, Pick Up In-Store

Dec. 16, 2019 1:49 PM ETTractor Supply Company (TSCO)3 Comments
David Krejca profile picture
David Krejca
2.83K Followers

Summary

  • Tractor Supply Company is a U.S. home improvement retail chain, focusing predominantly on outdoor supplies and equipment.
  • In the last quarter, the company opened 25 new stores and managed to achieve operational efficiency improvements.
  • Valuation suggests the shares currently trade below their intrinsic value.
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Investment Thesis

Shares of Tractor Supply Company (NASDAQ:TSCO) have not changed much in price over the last year despite continued positive development of the company’s fundamentals. I believe this imbalance between the share price and the company’s underlying business value is unlikely to stay for an extended period of time and the share price will sooner or later catch up and close the gap.

Corporate profile

Tractor Supply Company is the largest rural home improvement lifestyle retail chain in the United States, based in Brentwood, Tennessee. The company’s portfolio includes a broad range of products from clothing & footware, pet supplies, lawn and garden supplies, heating supplies, fencing, welding tools to lawn movers and power generators. As of December 29, 2018, the company operated 1940 retail stores in 49 states and employed approximately 15,000 full-time and 14,000 part-time TS team members.

Key insights from the quarterly earnings call

In the third quarter of 2019, the company opened 25 new tractor supply stores, one pet sense location and reported positive operating margin improvements. The management of the company talked a lot about uncertain weather and mentioned that what was selling was anything that moves water.

We are pleased with the traction we're gaining with our key initiatives and specific examples include capabilities such as growth of our Neighbor's Club engagement. The chain-wide rollout of our Stockyard Kiosk and mobile point-of-sale, enhancing our Tractor Supply credit card offering and investments in our supply chain. - Gregory Sandfort, CEO

A steadily decreasing number of shares outstanding

Over the last decade, the company’s number of shares outstanding decreased by a significant amount. In 2010, the company had around 144 million shares outstanding which reduced to 118 million in the last nine years.

Financials

From a financial perspective, the company has very little debt, enough liquidity on its balance sheet and solid profitability metrics. Over the past five years, the company managed to substantially grow its asset base to a balance sheet sum of 3.187 billion USD from 2.035 billion USD in 2014. As of 2018, the company’s ROE, ROA and ROI stood at 34, 17 and 22 percent respectively.

Valuation

Plugging in Tractor Supply's financial statement figures into my DCF template, the company’s shares show to be slightly undervalued. Under the perpetuity growth method with a terminal growth rate of 2 percent, 8 percent annual revenue growth over the next five years and stable operating income margin of 8.9 percent assumption, the model’s estimate of intrinsic value of the stock comes at 153.11 USD. Under the EBITDA multiple approach of a discounted cash flow model, the intrinsic value per-share value of the company stands roughly at 106.22 USD if we assume that the appropriate exit EV/EBITDA multiple in five years' time is around 10x.

Source: Author's own DCF model

The bottom line

To sum up, Tractor Supply is an outstanding home improvement retail chain with a primary focus on outdoor supplies and equipment. The company has a solid financial position and excellent profitability metrics. With strong business fundamentals and lagging share price, I believe Tractor Supply's shares are set to go higher.

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This article was written by

David Krejca profile picture
2.83K Followers
Research analyst, individual investor. Queen Mary University of London alumnus. Successfully passed Level I of the CFA Program (June 2016). Seeking growth-at-a-reasonable-price (GARP), income and profitable growth opportunities regardless of geography, industry and market cap. Value, recent IPOs and high-growth companies. All articles are my opinions and do not constitute investment recommendations or advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Please note that this article has an informative purpose, expresses its author's opinion, and does not constitute investment recommendation or advice. The author does not know individual investor's circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.

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