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Put TSCO on Your Radar

Tractor Supply (TSCO) is the largest operator of farm and ranch stores in the United States, with around 1500 locations. TSCO stock is also a big winner, compounding at 21% a year during the last decade. So why haven’t I gotten my clients in? The stock is usually too-high to buy. Here’s my take from 2012, in my TSCO research 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.

The stock was $45 at the time (after splits) and is now pushing $100. Truth is TSCO wasn’t overvalued at the time. It went on to grow profits 26% in 2012, and 22% in 2013. The P/E was in the mid 20s last year, and the stock’s still gone from $65, then to $70, then to the current $93.

But now the stock’s really overvalued. I promise. With a P/E of 30. The estimated long-term growth rate is 15% plus the company pays a dividend of 1%. 16% growth. Management also buys back stock in addition to expanding, so maybe TSCO can grow at 18%. Still, a 30 P/E is too high, but that goes to show the stock market we are in. One where growth stocks are admired so much they are overvalaued.

Ten Year Chart

TSCO_2015_Q3_10yrWhat gets me is this ten-year chart shows a stock continuing to climb at the rate it did around ten years ago when profits were growing at a much faster rate. Yes Tractor Supply is a great company, but P/Es can’t keep rising forever.

In fact, the 30 P/E is the highest I ever remember TSCO having, and the Profit History table below shows the median P/E hasn’t been higher than 26 any year this decade.

Profit History

TSCO_2015_Q3_PHI feel we should be able to buy this stock at 25 times earnings. That would be a $77 stock price and a drop 17% to get there. The last time TSCO fell in 2014 it was because the company had a poor qtr, which made me cautious and I missed out. I tried to be patient and get in at a lower price, but the stock never got to be undervalued. Last time I saw it reasonable was in November 2012 when the P/E was 21.

Sharek’s Take

Tractor Supply is a more valuable stock than I gave it credit for. The combination of more stores, more sales per store, stock buybacks and dividends is exactly what smart investors look for. The issue now is the P/E of 30, which is higher than the 25 to 27 its traded for during much of the last three years. Every stock market corrects, and this one will too. When it does save room in your portfolio for TSCO, I know I will. With the stock around $93 I’d love to buy in at $80.

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

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