Tractor Supply Co. (NASDAQ: TSCO) is an American retail company that offers product solutions for home improvement, garden, livestock maintenance and agriculture.
Operating more than 2,000 stores across the country, the company has displayed a solid history of growth and profitability, with the recent surge in stock price, however, placing concerns over TSCO’s valuation.
Growth, profitability and valuation will be examined in this analysis, along with the main macroeconomic factors affecting the company. I am neutral on the stock.
Recent Stock Performance
After a sharp drop during the COVID-19 crisis in early 2020, Tractor Supply’s stock has since been on a momentous run-up reaching a $236 price to end 2021, representing a 237% increase from 2020’s lows.
In terms of more recent performance, the stock has risen 28.6% over the last six-month period. Currently, TSCO also offers a small 0.9% forward dividend yield.
Growth and Profitability
Tractor Supply has presented a convincing growth record over the last few years. While revenue has been growing at a five-year 13.55% CAGR, over the last year growth has accelerated, with the company recording 23.72% year-over-year growth.
EBITDA and net income follow similar trajectories with three-year CAGRs of 22.25% and 21.74%, respectively.
In terms of profitability, TSCO operates at a comfortable 35.41% gross and a decent 7.42% net margin. What is also telling for the efficiency of Tractor Supply is the long-term stability of its margins. Gross margin has stayed unfazed in the 33%-36% range over the past decade, while net income margin has also displayed minimum variance, staying in the 5.5%-7.8% range.
Revenue and profit predictability are also very useful for analysts trying to provide valuation estimates for the company.
In 2021, accelerated growth is expected to continue before slowing down for the following years. Revenue and net income in 2021 are projected to grow at 18.86% and 23.97% year-over-year rates, with 2022 and 2023 growth scaling back to high single digits.
Operating inside the Consumer Discretionary sector, the Home Improvement industry has grown significantly over the last few years.
According to research by GlobalData, DIY projects have become increasingly popular, with 77.2% of people taking up at least one home improvement project in 2020, up from 68.2% in 2019.
While staying indoors due to coronavirus health concerns had a significant part in that trend, the industry outlook for the coming decade is promising. The Home Improvement Services market is expected to reach $585.3 billion in value by 2030, according to ResearchandMarkets.com.
According to the same research, rising interest rates and property costs will be the primary growth drivers. With a new home purchase becoming unattainable for many, consumers will turn to the purchasing and remodeling of older houses, while others will lean on renovating or refurbishing properties they already own.
The total number of small-scale and backyard livestock and poultry owners in rural, suburban and even urban areas has also increased significantly over the last few years, accelerated by the COVID-19 pandemic.
Along with raised demand for gardening products and equipment, this trend also benefits Tractor Supply’s business.
While the recent accelerated price appreciation has caused TSCO’s dividend yield to fall, the company is still praised as a sound long-term choice for income and growth-oriented investors.
The current forward yield of 0.9% is considered safe, accompanied by a very low 24.9% payout ratio. When it comes to long-term growth, Tractor Supply has 11 consecutive years of increases in distributions to show, with a very respectable five-year 17.72% annualized growth rate.
TSCO has also been committed to rewarding investors through share buybacks, hence the diluted average share count has decreased from 150 million in 2012 to 117 million at the end of 2020.
This significant reduction in shares outstanding implies an average annualized 2.7% decrease over the past decade.
While the impressive run-up the stock has experienced in 2020 has been music to the ears of shareholders, it has also potentially dragged the company into overvalued territory.
The 27.4x forward P/E and 2.2x P/S ratio are both double the sector average and without a doubt place the stock on the expensive side of an already highly valued market.
EV/EBITDA and P/Cash Flow multiples tell the same story, both being way higher than historic and sector averages.
Wall Street’s Take
Turning to Wall Street, Tractor Supply has a Moderate Buy consensus
rating, based on 11 Buys, eight Holds, and zero Sells assigned in the last three months.
The average TSCO price target, however, at $229.32, represents 2.7% downside from current price levels, with a high forecast of $255 and a low forecast of $210.
Disclosure: At the time of publication, Alex Galanis did not have a position in any of the securities mentioned in this article.
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