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Off Its Perch

One of the bad things about Bull Markets is they often take good stocks up higher than they should. Stocks that grow at say 17% per year normally have P/E’s of 17, but in a Bull Market that stock could get a P/E higher than it deserves, say 25 or more.

Tractor Supply (TSCO) is a perfect example of a stock that’s benefited more than it should have from the current Bull Market. TSCO is a wonderful company, like a home-town Home Depot that carters to small towns. Selling hardware and feed.

The company is efficiently run as well. During the last decade, annual profits have dropped just once, during the panic of 2008 (there was a time during that year when everyone stayed at home and worried). TSCO has grown profits at a rate of 20% a year during the last decade, and is expected to grow them 17% a year for the next 3-to-5 years. This stock should have a P/E of around 20, but TSCO ran hotter than it should have last year, and the P/E jumped to 27 last quarter. Now the stock is down off its highs, so see if this would be a good time to get in.

One Year Chart

TSCO_2014_Q1TSCO fell a bit after it reported profits last quarter. The stock had been a runaway winner in 2013, rising from $45 to $78. When I researched the stock last quarter it had a P/E of 27. With that kind of premium, any sort of bad news — or in this case regular news — will spark a selloff. And that’s what happened: regular news.

Although TSCO beat the street by 3 cents and had 21% profit growth, the stock sold off. I think it was because 2014 estimates are a tad lower than they were last quarter. Now with the shares around $67 ($10 off its highs) it has a P/E of 25. It’s still too high to buy.

Fair Value

TSCO_2014_Q1_FVBefore last year, Tractor Supply had annual median P/Es of between 13 and 24. I feel the stock would be a good buy at 21 times earnings. At that price you could get in, sit back, and hope to make that 17% a year compounded. The company also pays a small dividend, which would give you another 1% or so.

Sharek’s Take

Tractor Supply was a darling for the stock market last year. Now the shares are trying to get back to where they should be. When I look at the one-year chart, I feel the stock is trying to build a cup pattern here, and will work its way towards $60. That still may be too high for me. $55 is what I feel si a fair price to pay for TSCO.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

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