Tractor Supply Offers the Right Stuff (Nasdaq: TSCO)
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(Stocks in this article: Nasdaq: TSCO, NYSE: TGT, NYSE: JCP, NYSE: LTD, NYSE: AEO, NYSE: MW, NYSE: GPS, Nasdaq: ZUMZ, NYSE: BKE, Nasdaq: WTSLA, Nasdaq: PSUN, NYSE: CAT, NYSE: DE)
In an industry impacted by softening consumer spending, we may have found the right niche to buck the trend and an opportune entry point as well.
As pressures mount on the American consumer, shares in the retail sector are coming under the microscope. However, the space may yet offer growth for those who look hard enough for it. Also, diversification loyalists will still need to set aside security asset allocation space for a retailer or two within their portfolios. If you fit this bill, and are looking for a retail name in such a troubled environment, we expect it’s going to take smart niche investment to succeed, and we think we have one such idea for you.
Troubled retail waters ahead…
Retailers reported chain-store sales for the month of September a few weeks ago, and the message was loud and clear. While there were isolated cases of growth, and sectors of strength, most retailers reported results short of expectations. The highest profile miss was Target (NYSE: TGT), which reported a weaker than expected September, while revising its Q3 forecast lower. Q4 is at risk for most as well; as currently stocked inventory will need to be marked down to make room for seasonal goods meant for holiday shoppers.
Target was not alone in the sea of Q3 earnings cutters, as it was accompanied by JC Penney (NYSE: JCP), Limited (NYSE: LTD), American Eagle Outfitters (NYSE: AEO), Men's Wearhouse (NYSE: MW) and The Gap (NYSE: GPS). While much of the blame was duly attributed to the relatively warmer period this year, it also seems clear that the pressure mounting on Mr. and Mrs. Consumer is finally taking its toll. As we forewarned in our article, “Three Good Reasons to be Weary,” teen retailers seemed to avoid trouble due to what we believe was "back to school" spillover, as Zumiez (Nasdaq: ZUMZ), Buckle (NYSE: BKE), Wet Seal (Nasdaq: WTSLA) and Pacific Sunwear (Nasdaq: PSUN) all exceeded expectations.
There are a slew of widely reported reasons why the consumer should cut back spending, but in case you’ve forgotten... Gasoline prices have been running ahead of the historical norm for some time now, with an intensifying supply/demand imbalance fueled partly by global economic development. Food prices have increased as well, driven by rising global demand, and also as corn has found a second use in the production of ethanol. With corn prices higher, farmers across the country have boosted crop acreage toward its production at the cost of its surrogates in soybean and wheat. As a result, the surrogate prices have risen as well, as have cattle, hog and chicken feed costs. The end result of all this is higher checkout receipts for supermarket shoppers and restaurant patrons alike.
As if that wasn’t enough, credit has become much harder to come by for consumers. Banks are treading cautiously after exuberant lending practices spawned more scrutiny from regulators. And for those troubled souls who entered into subprime mortgages with variable rates, the reset process has begun, and monthly mortgage expenses are on the rise. So there is plenty enough reason for the consumer money belt to tighten.
In an environment like this, specialty niche players in the retail sector may offer up the shares that outperform in the months ahead, if we select the right niche. What better sector to participate in than the agricultural group right? If farmers are finding improved pricing for their goods, then they must be investing in equipment, supplies and other offerings toward business growth, or at least we expect so. After all, Caterpillar (NYSE: CAT), which sells a significant amount of equipment into the agricultural space, has provided a total return of 25% this year (through Oct. 24), while Deere & Co. (NYSE: DE) has returned 57%.
The subject of our review, Tractor Supply (Nasdaq: TSCO) describes itself as a specialty retailer “focused on supplying the lifestyle needs of recreational farmers and ranchers, and serving the maintenance needs of those who enjoy the rural lifestyle, as well as tradesman and small businesses.” That doesn’t sound like the hardcore farmer to us, but even so, the store likely does decent business with farmers too. Management believes it is impacted some by consumer softness, but we suspect its niche is unique enough that the competitive landscape may allow more room for error than within other overcrowded sectors of retail.
With some 700 plus stores, the company is about half way to its target count of 1,400, and has yet to embark on significant expansion west of the Mississippi. Over the past five years, Tractor Supply has grown its store count at about a 16% pace, and the company plans to continue store growth at a roughly 13% average annual rate in years to come. The company expends important resources on training employees in order to insure quality growth at that rate.
The Greek followed the company as an analyst on Wall Street, and attributes TSCO’s success directly to Jim Wright, its President and CEO. The company really gained direction and purpose with his hiring as COO, and if he were to join another company, the shares of that firm would immediately reach my radar screen as a possible buy candidate.
We wrote a piece for another venue a few weeks ago, within which we warned of an “important caveat to be aware of” with regard to TSCO purchase. We said, “Seasonal factors have impacted results in the past and are certainly possible this quarter, due to the relatively warm period.” We further advised, “We would advise investors to wait for and then look past seasonal noise, and use any seasonal weakness this quarter as an opportunity to take position and participate in the company’s long-term run we anticipate.”
Well, the time has come. Tractor Supply posted disappointing results on Wednesday night, missing EPS consensus by $0.03 on none other than seasonal weakness. Irregular warmth, and drought conditions in some of the company’s markets, impacted various product categories. Since it has continued warm deep into October (read Q4 implications), the company also revised guidance lower for the full-year 2007. TSCO’s new forecast factors in less than favorable weather for Q4 as well, and calls for EPS to fall in a range of $2.37 to $2.43, compared with its previous forecast of $2.49 to $2.56. Going forward, management does not see any need for markdowns. However, the company noted some impact from housing related product categories, and this is one risk to continue to worry about.
TSCO fell 1.7% in after-hours trading, after dropping nearly 2% on Wednesday. Still, as the dust settles, we would recommend investors consider the shares. Over the past five years through 2006, revenues have grown near 23% annually, while EPS have risen 26%. Analysts estimate EPS should grow 17.4% over the next five years. At the growth offered, we find the shares very appealing, trading at just 18X the midpoint of the company’s ‘07 forecast range and 14.8X the ’08 consensus estimate of $2.93 (based on the $43.24 after-hours price we found).
The forward estimate is likely to come down $0.05 to $0.10, but even if it drops to $2.83, the shares would be valued at 15.3X that number. If weather really was a factor, than there should be no reason to believe the company could not earn the $2.93 that was expected for next year. Given its growth potential, TSCO’s P/E/G ratio of 0.9, based on the most conservative of our ’08 EPS estimates, is the kind of value that made my mouth water during my time on Wall Street. Enough said! Given a normal market environment, meaning WWIII does not break out, then this would be a stock I would look to own for 3 to 5 years, and it looks like a good entry point is presenting itself.
As pressures mount on the American consumer, shares in the retail sector are coming under the microscope. However, the space may yet offer growth for those who look hard enough for it. Also, diversification loyalists will still need to set aside security asset allocation space for a retailer or two within their portfolios. If you fit this bill, and are looking for a retail name in such a troubled environment, we expect it’s going to take smart niche investment to succeed, and we think we have one such idea for you.
Troubled retail waters ahead…
Retailers reported chain-store sales for the month of September a few weeks ago, and the message was loud and clear. While there were isolated cases of growth, and sectors of strength, most retailers reported results short of expectations. The highest profile miss was Target (NYSE: TGT), which reported a weaker than expected September, while revising its Q3 forecast lower. Q4 is at risk for most as well; as currently stocked inventory will need to be marked down to make room for seasonal goods meant for holiday shoppers.
Target was not alone in the sea of Q3 earnings cutters, as it was accompanied by JC Penney (NYSE: JCP), Limited (NYSE: LTD), American Eagle Outfitters (NYSE: AEO), Men's Wearhouse (NYSE: MW) and The Gap (NYSE: GPS). While much of the blame was duly attributed to the relatively warmer period this year, it also seems clear that the pressure mounting on Mr. and Mrs. Consumer is finally taking its toll. As we forewarned in our article, “Three Good Reasons to be Weary,” teen retailers seemed to avoid trouble due to what we believe was "back to school" spillover, as Zumiez (Nasdaq: ZUMZ), Buckle (NYSE: BKE), Wet Seal (Nasdaq: WTSLA) and Pacific Sunwear (Nasdaq: PSUN) all exceeded expectations.
There are a slew of widely reported reasons why the consumer should cut back spending, but in case you’ve forgotten... Gasoline prices have been running ahead of the historical norm for some time now, with an intensifying supply/demand imbalance fueled partly by global economic development. Food prices have increased as well, driven by rising global demand, and also as corn has found a second use in the production of ethanol. With corn prices higher, farmers across the country have boosted crop acreage toward its production at the cost of its surrogates in soybean and wheat. As a result, the surrogate prices have risen as well, as have cattle, hog and chicken feed costs. The end result of all this is higher checkout receipts for supermarket shoppers and restaurant patrons alike.
As if that wasn’t enough, credit has become much harder to come by for consumers. Banks are treading cautiously after exuberant lending practices spawned more scrutiny from regulators. And for those troubled souls who entered into subprime mortgages with variable rates, the reset process has begun, and monthly mortgage expenses are on the rise. So there is plenty enough reason for the consumer money belt to tighten.
In an environment like this, specialty niche players in the retail sector may offer up the shares that outperform in the months ahead, if we select the right niche. What better sector to participate in than the agricultural group right? If farmers are finding improved pricing for their goods, then they must be investing in equipment, supplies and other offerings toward business growth, or at least we expect so. After all, Caterpillar (NYSE: CAT), which sells a significant amount of equipment into the agricultural space, has provided a total return of 25% this year (through Oct. 24), while Deere & Co. (NYSE: DE) has returned 57%.
The subject of our review, Tractor Supply (Nasdaq: TSCO) describes itself as a specialty retailer “focused on supplying the lifestyle needs of recreational farmers and ranchers, and serving the maintenance needs of those who enjoy the rural lifestyle, as well as tradesman and small businesses.” That doesn’t sound like the hardcore farmer to us, but even so, the store likely does decent business with farmers too. Management believes it is impacted some by consumer softness, but we suspect its niche is unique enough that the competitive landscape may allow more room for error than within other overcrowded sectors of retail.
With some 700 plus stores, the company is about half way to its target count of 1,400, and has yet to embark on significant expansion west of the Mississippi. Over the past five years, Tractor Supply has grown its store count at about a 16% pace, and the company plans to continue store growth at a roughly 13% average annual rate in years to come. The company expends important resources on training employees in order to insure quality growth at that rate.
The Greek followed the company as an analyst on Wall Street, and attributes TSCO’s success directly to Jim Wright, its President and CEO. The company really gained direction and purpose with his hiring as COO, and if he were to join another company, the shares of that firm would immediately reach my radar screen as a possible buy candidate.
We wrote a piece for another venue a few weeks ago, within which we warned of an “important caveat to be aware of” with regard to TSCO purchase. We said, “Seasonal factors have impacted results in the past and are certainly possible this quarter, due to the relatively warm period.” We further advised, “We would advise investors to wait for and then look past seasonal noise, and use any seasonal weakness this quarter as an opportunity to take position and participate in the company’s long-term run we anticipate.”
Well, the time has come. Tractor Supply posted disappointing results on Wednesday night, missing EPS consensus by $0.03 on none other than seasonal weakness. Irregular warmth, and drought conditions in some of the company’s markets, impacted various product categories. Since it has continued warm deep into October (read Q4 implications), the company also revised guidance lower for the full-year 2007. TSCO’s new forecast factors in less than favorable weather for Q4 as well, and calls for EPS to fall in a range of $2.37 to $2.43, compared with its previous forecast of $2.49 to $2.56. Going forward, management does not see any need for markdowns. However, the company noted some impact from housing related product categories, and this is one risk to continue to worry about.
TSCO fell 1.7% in after-hours trading, after dropping nearly 2% on Wednesday. Still, as the dust settles, we would recommend investors consider the shares. Over the past five years through 2006, revenues have grown near 23% annually, while EPS have risen 26%. Analysts estimate EPS should grow 17.4% over the next five years. At the growth offered, we find the shares very appealing, trading at just 18X the midpoint of the company’s ‘07 forecast range and 14.8X the ’08 consensus estimate of $2.93 (based on the $43.24 after-hours price we found).
The forward estimate is likely to come down $0.05 to $0.10, but even if it drops to $2.83, the shares would be valued at 15.3X that number. If weather really was a factor, than there should be no reason to believe the company could not earn the $2.93 that was expected for next year. Given its growth potential, TSCO’s P/E/G ratio of 0.9, based on the most conservative of our ’08 EPS estimates, is the kind of value that made my mouth water during my time on Wall Street. Enough said! Given a normal market environment, meaning WWIII does not break out, then this would be a stock I would look to own for 3 to 5 years, and it looks like a good entry point is presenting itself.
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posted by The Greek | 8:48 PM
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