This stock is up 1,000% since 2008

Tractor Supply is a go-to destination for some shoppers. What's more, it sports an even better return on investment than Apple.

By StreetAuthority May 19, 2014 11:59AM
A Tractor Supply Company retail store
© Kristoffer Tripplaar / AlamyBy Marshall Hargrave

Among the many industries dragged down the weakness of the global economy during the financial crisis and Great Recession, the entire construction sector was pulled down even more than the broader market.

Shares of leading equipment maker Caterpillar (CAT) traded as low as $24 in 2009, down by 70 percent from their 2008 high. Deere & Co. (DE) tumbled by 65 percent from its high during the financial crisis. In comparison, the S&P 500 Index was down by 55 percent -- a whopping figure but less than these construction names.

However, there is a stock that is often lumped in with the major construction stocks when it's actually a retailer. Shares of this company have held up nicely despite the market weakness that crippled the construction sector.

Shares of Tractor Supply Co. (TSCO) fell by 30 percent from their peak in 2008 -- but since then, shares are up nearly tenfold:

One of the nation's leading retailers of farming and garden-related products, Tractor Supply is easily overlooked, in part because it caters to only a handful of shoppers, unlike Wal-Mart (WMT).

However, Tractor Supply is the go-to spot for farmers and ranchers, and that loyal following lends itself to a recurring revenue stream. The retail farming business is very resilient, and there's nothing to suggest this will change anytime soon.

Shares are down over 15 percent this year. Last quarter came in weak for the company, with earnings missing consensus by 5 percent. Despite this, TSCO's pullback could be a great buying opportunity.

Comparable-store sales were actually up 2.2 percent, but this was a decline from the 3.5 percent growth in the previous quarter. The biggest issues appeared to be the severe winter weather and costs from the opening of a distribution center. Despite this, the company still managed to attract shoppers. Store traffic grew for the 24th consecutive quarter.

No other retailer offers a similar product line. Sears Hometown and Outlet Stores (SHOS) sells certain hardware and gardening products, but they primarily cater to everyday consumers and not farmers. There is Lowe's (LOW) and Home Depot (HD), but Tractor Supply has fended off competition from these two by focusing on smaller, rural markets.

In addition to its cultlike following from farmers, there's still room for store growth. Its margins are impressive for a retailer, with a profit margin of over 6 percent for the trailing 12 months. Neither Sears Hometown nor Wal-Mart can rival Tractor Supply's margins. Tractor Supply also has negligible debt and a return on investment that's close to 30 percent.

You won't get a return on investment as strong as Tractor Supply's from any of those other retailers -- in fact, not even Apple (AAPL) produces as strong a return on investment as Tractor Supply.

Tractor Supply has a store base of just over 1,300. It's planning to open just over 100 stores this year, with a long-term target of 2,100 stores. The focus will be on expanding outside of its core markets in the Midwest and southern U.S. But adding more stores isn't Tractor Supply's only growth opportunity. The company will be opening smaller stores and converting some older stores to larger formats to better meet customers' needs in key markets.

With its superior position in the market, Tractor Supply has historically traded at a premium. Its five-year average price-to-earnings ratio (P/E) is 24, but TSCO is trading at a forward P/E multiple of 21 based on next year's expected earnings. The stock pays a slim 1 percent dividend yield, but with the company's cash flow and low payout ratio of 22 percent, there's room for growth.

Risks to consider: Despite its resiliency during the last financial crisis, an economic slowdown will undoubtedly have an impact on the company's sales. The biggest issue is competition, should either Home Depot or Wal-Mart gain traction with their smaller store formats, they could look to push into Tractor Supply's markets.

Action to take:
Buy Tractor Supply as a long-term investment. Shares are 15 percent off their 52-week high from a few months ago, but Wall Street's consensus price target is $76. That's an 18 percent upside. And of the 26 analyst ratings on the stock, none are a "sell."

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

May 19, 2014 1:01PM
Like we said this morning, be very careful; after Friday these manipulators not pleased at all and came out selling....Yes, we recovered a bit but could just be a sucker's rally, we are trying to figure this out....The Dow in the red after the call came at about 1230 hrs.....Be hopeful but remain cautious...More later.
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