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Pets, Farms And Tractor Supply Company

|About: Tractor Supply Company (TSCO), Includes: PETM

The pet industry has been relentless in the last few years, even during economic downturns. Baby boomers are aging and more pets are replacing children in their homes and this is partly why the spending in the pet industry has surpassed $50 billion dollars. A record 72.9 million households now have a pet and this number is expected to continue to escalate in the coming years. Revenue for the pet industry does not just come from individual households with pets. An increasing number of dogs, horses and other pets are used in therapeutic services to help seniors, students, the disabled and war veterans.

When looking into investing in pet stocks there are many companies to choose from, however, I see great potential in two particular stocks: The Tractor Supply Company (NASDAQ:TSCO) and PetSmart (NASDAQ:PETM). Tractor Supply Company is the largest retail farm and ranch store chain in the United States. The company started in 1938 as a mail order tractor parts business and now operates 1117 stores in 44 states. The company also owns Del's Feed and Farm Supply which has stores in rural communities across the Northwest and Hawaii. With 39% of net sales for Tractor Supply in the livestock and Pet segment, it can really leverage the booming pet business.

PetSmart, founded in 1937, is the largest specialty retailer of services and solutions for the lifetime needs of pets. The company operates 1232 stores in the United States, Canada and Puerto Rico. In addition to selling a wide range of pet products, PetSmart also offers services such as veterinarian care, pet grooming, pet training, PetsHotels and Doggie Day Camps.

PetSmart has a P/E ratio of 23.72 and Tractor Supply has a P/E ratio of 26.08, both of which are higher than the average specialty retailer industry P/E ratio of 13.54. Tractor Supply has a market cap of 6.24 billion and shares are up about 25% year to date. On the other hand, PetSmart shares are up about 30% year to date with a market cap of 7.19B.




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PetSmart has a higher Free Cash Flow per share and higher ROE than Tractor Supply. However, Tractor Supply has much better EPS growth, lower debt and twice the sales of PetSmart. There are also a couple of other reasons why I think Tractor Supply is in a better position than PetSmart:

Farming and Agriculture

One of the reasons is its presence in the farming and agriculture sector, which I believe will perform very well in the coming years. According to the Food and Agriculture Organization (FAO), food production has to increase by 70% to feed an additional 2.3 billion people by the year 2050. The FAO also states that arable land will have to expand by 120 million hectares in developing countries. These could be a few reasons why agricultural investing and farming in general are getting much attention as of late. Renowned investors such as Warren Buffett and Jim Rogers have gotten behind the farmland values too. Warren Buffett has said that he would chose farmland over gold any day and Jim Rogers thinks that the world is running out of farmers and that farming will be one of the great industries over the next 20 years. "Eventually it's the farmers driving the Lamborghinis!" says Jim Rogers.

The growing global population and the increase in food demand and prices will fuel the demand for agricultural produce which in turn would lead to an increase in demand for farm and agricultural equipment. On a smaller scale, individuals across the U.S and around the world desire to live more sustainably and are growing their own food, too. According to the 2012 National Gardening Survey, household participation in DIY lawn and garden activities increased by 3 million households compared to last year which translated into an extra $688 million in retail sales of Lawn and Garden across the nation. Therefore, Tractor Supply Company should be a worthwhile addition to many portfolios

Competition and Differentiation

Tractor Supply Company has no real direct competition due to their unique market niche and the distinctive combination of products sold at their stores. They cater to farmers (mostly part-time/hobby farmers), rural landowners, horse owners, ranchers, suburban homeowners and anyone who "enjoys the rural lifestyle". Their products include men and women's work-wear and footwear; animal care products (pet supplies, animal feed, other equine and small animal products); power tools, lawn and garden equipment; truck, towing and hardware tools and general maintenance products for agricultural and rural use. Another factor that plays a key role in lessening Tractor Supply's competition is its strategic location of its stores in rural communities and suburbs outside metropolitan areas - away from most big box retailers such as Wal-Mart and Target. I believe that this competitive advantage is sustainable which in turn may resist the entry of new competitors. PetSmart, however, is a little more vulnerable to competition. The Pet industry is a highly fragmented industry and therefore provides great opportunities for new companies to enter, increasing the already high competition in this sector. The challenge then, is to differentiate from the rest in order to give the consumers a clear reason to choose them over their competitors.

PetSmart differentiates itself from other retailers selling pet supplies by providing additional services such as pet grooming, dog training and veterinary services. However, only about 10% of their revenue comes from this segment (and this is an area in which the consumers are likely to cut back on during economic hardships). The remaining 90% comprises of consumables (pet food, etc.) and hardgoods (leash, collars, etc.) and this is where the retailers like Target and Wal-Mart can chip away at PetSmart's market share by offering products at lower prices.

This is not to say that Tractor Supply is impenetrable. Other companies will compete for Tractor Supply's customers by carrying similar products or by beating their prices. However, there is something about the culture of this company that will make them stand apart from the others argues Joe Calloway, the author of "Becoming a Category of One: How Extraordinary Companies Transcend Commodity and Defy Comparison". The book is based on the idea that it is better to differentiate yourself by creating a category and being the only one in it, rather than trying to become a leader in the category that you are in already. This is exactly what Tractor Supply has done. In his book, Calloway talks about the connection Tractor Supply makes with its customers and he uses customer satisfaction letters to emphasize the company's values, mission and "legendary service". I don't know how many can truly say that they receive legendary service at PetSmart.


Both Tractor Supply and PetSmart may greatly reap profits from the growing pet industry. However, Tractor Supply, with its unique mix of products, no direct competition, strong management team, strong ethical values behind the company and great fundamentals makes it a compelling long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.