Tractor Supply (TSCO) had been a market leader from 2009 to 2013. Now the stock has lost it’s luster, which isn’t exactly a surprise.
TSCO is a home improvement/farming supply store. With just over 1000 locations it has the ability to expand to 2000. Here’s my take from 2012, in my report Solid Ground:
The combination of store expansion in the high-single digits, expanding profit margins, and same-store sales of 3% to 4% (3.2% last quarter, missing estimates of 4.6%) should mean profit growth of 18% a year. TSCO also pays a 1% dividend. The bad news is TSCO has a 24 P/E, so the stock’s overvalued.
I wrote that when the stock was $45 (after splits). Now TSCO is $67. So far my take has been incorrect, but I stand firm that the stock’s still overvalued. You see, Tractor Supply should grow at a little less than 20% a year under normal circumstances. During 2009-2013 it grew faster than that, but recently growth has slowed. The company’s annual profit growth rate has slipped from 43% to 34%, 26% and 22% last year. This year 13% growth is expected, and that’s not good enough to keep the stock’s P/E in the high-20s.
I think TSCO will eventually get back down to selling for 20 times earnings, and right now that’s a 20% decline from these levels.
One Year Chart
The one-year chart shows a lot about this stock. When profits were growing an average of 24% a quarter the first three quarters shown here, the stock went up. Then when TSCO didn’t up estimates after it reported 2QtrsAgo the stock fell. 13% growth hit last quarter and the stock was weak once more.
Yet still Tractor Supply sports a P/E of 25. Notice that’s a lot higher than the Est. Long Term Growth Rate of 17%. Estimates don’t look good either.
Fair Value
I don’t see TSCO moving higher. It’s overvalued by 20%. I think now is the time the stock comes back down to selling for 20 time earnings — which is the median annual P/E the stock’s had during the past decade.
Sharek’s Take
Tractor Supply used to be a barometer of the market (2012-2013). If TSCO went up that meant the market did too. But that was when profits were growing 20% or more. Now things have gotten tougher and TSCO has lost its luster. I feel the stock’s overvalued by 20% and will continue on its new downward trend.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
