Inside Wall Street: Analysts split over Tractor Supply

Is a drop in the share price of the largest US chain of farm and ranch stores an opportunity?

By Gene Marcial Jun 21, 2012 12:34PM
Image: Construction (© Photodisc Green/Getty Images)Shares of Tractor Supply (TSCO) had been on a tear, nearly doubling to about $100 in late May 2012 from $53 in August last year, powered by strong sales and earnings growth.

But some analysts have warned of a possible slowing in demand from recreational farmers and ranchers for livestock and farm products, as well as for seasonal lawn and garden equipment amid a weakened economic recovery.


Tractor Supply's stock has since declined to $88 a share, driving a split in opinion on Wall Street about the company's valuation. Those expressing concern include S&P Capital IQ, which has stamped a "sell" rating on the stock, and KeyBanc Capital Markets, which has downgraded it from a "buy" to a "hold."


"We think TSCO shares are overvalued at about 27 times our 2012 earnings-per-share estimate, a significant premium to the S&P MidCap 400 index," says Michael Souers, analyst at S&P Capital IQ.


On the other hand, Nomura analyst Aram Rubinson is convinced the stock's pullback has created "a solid, absolute and relative opportunity" to buy the stock at its depressed price. And SunTrust Robinson Humphrey also believes the stock's weakness has created a buying opportunity.


"While the stock's premium valuation does make it vulnerable to negative data points, such as the Scotts Miracle-Gro news, we remain bullish on Tractor Supply stock and view today's pressure as a buying opportunity," says David G. Magee, analyst at SunTrust Robinson Humphrey. Scotts Miracle-Gro, a retailer of farm products, announced on June 12 that it expected to miss its sales and earnings guidance, partly due to weakness in demand for seasonal gardening products. However, Magee thinks Tractor Supply's stock price should go higher, to $110 a share over the next 12 months.


The analyst notes that Tractor's weakness follows some recent pressure, driven by suggestions that its first-quarter strong sales may have created a greater-than-expected drag on the second-quarter results. "While the Scotts Miracle-Gro news is adding some fuel to those concerns, we would note that Miracle-Gro is a very small vendor to Tractor Supply and the lawn and garden category overall is estimated at less than 10% of Tractor Supply's sales," says Magee.


So Magee sees limited risk to estimates for Tractor Supply's second-quarter results, and figures there could be some "modest upside" to the Street's $1.40 a share forecast for the second quarter. Magee forecasts Tractor Supply will earn $3.65 a share in 2012 on sales of $4.67 billion, and forecasts earnings of $4.25 a share for 2013 on sales of $5.13 billion.


Nomura's Rubinson forecasts higher earnings of $3.85 a share for 2012 on sales of $4.75 billion, and $4.60 a share for 2013 on sales of $5.26 billion. Tractor Supply is "typically atop our universe when it comes to valuation," he says. At 10 times his 2013 EBITDA estimate, Tractor Supply now trades at a discount to its peers, notes the analyst. And it isn't too far, he adds, from other retailers with lower growth rates, like Home Depot (HD) which trades at 8.6 times EBITDA and PetSmart (PETM) at 8.3 times EBITDA.


Regardless of a potentially "soft month" ahead, says Rubinson, Tractor Supply has as much growth or more than any other hard-line goods retailer. It has an opportunity, he figures, to grow unit sales at 8% to 10% a year. "That is because Tractor Supply is one of the best merchants in retail and it is continually stacking new initiatives on top of one another," says Rubinson.


The analyst sees Tractor Supply selling a wider array of goods and possibly transforming itself into a much bigger retailer of many other types of products. Already it is expanding its lines of merchandise and testing them in some markets. Products being tested include fruit trees, mulch, logging boots, kids clothing, recreational vehicle parts, maple syrup, ice fishing gear, inner tubes, furniture, and even jewelry.


"The hard-to-define nature of Tractor Supply's category makes its offerings more boundless than others," says Rubinson. For as long as the company listens to its customers and tests products diligently, Tractor Supply can sell a broader range of goods, "a bit like Bed & Bath did when it added the 'Beyond' component," argues Rubinson.

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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