Tractor Supply (TSCO) is a Farmer’s Solid Ground

Tractor Supply (TSCO) is a farmer’s dream. The stores sell feed, hardware, fertilizer, tools and machinery. TSCO is also a good investment. Company profits have grown 22% a year and the stock’s done even better, compounding at a 27% per-year run-rate. With 1085 stores in operation at the beginning of the year — mostly in the Eastern U.S. —  Tractor Supply has the ability to grow into 2000 stores, and is expanding its store could around 8% per year.

Tractor Supply is getting more efficient too. Here’s operating profit margin for the last five years (from TSCO’s Invest Tennessee 2012 Equity Conference):

2007 6.1%
2008 5.9%
2009 6.0%
2010 7.3%
2011 8.3%
Goal 9.5%

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.

One-Year Chart

This stock was cheaper last year. I should have bought it then, but the housing market wasn’t as good then. Now with a P/E of 24 this stock is a better buy at 20 times earnings — wait for $74.

Also notice profit growth has slowed to below 20%. I like 20% growers, so this stock might be better for a conservative growth portfolio than my Growth Portfolio.

I love that Annual EPS Growth shows profit growth in every year except the difficult 2008. 2008 scared a lot of people — a lot of business stopped altogether. I’m sure the farmers curtailed purchases.

Fair Value

I’m thinking TSCO is worth 20 times earnings. Estimates should keep increasing because the housing market is getting better, so these Fair Values will grow a little as we head into fall.

Sharek’s Take

TSCO is a very good stock. The housing market keeps getting better and that will help keep momentum going. I like this stock but feel its a little high. Also, when you look at the ten-year chart you’ll see the stock’s already made a big run. I’d like to see it come down some. TSCO is a good buy at $74.