StreetWise: Tractor Supply stepping on the gas

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Successful investing in any market is all about uncovering underpriced fundamental value. Ignore the foreseers of doom, treat fundamental value as a religious doctrine and concentrate your research on companies whose past performance is one of growth and increased earnings.

One potential investment candidate you might consider -- and one that I began writing about last year after a hiatus of several years -- is Tractor Supply (TSCO).

Tractor Supply's stores are focused on meeting the requirements of recreational farmers and ranchers, as well as tradesmen and small businesses with stores that are located primarily in outlying areas of major metropolitan markets.

When I wrote about the company a year ago, the shares were trading at $88.29. My earnings estimate for 2012 was $3.39 per share with a 12-month price target of $96, yielding a potential 8.7 percent capital gain. So what was the net result? Earnings for 2012 came in at $3.80, and the shares recently closed at $102.79.

Looking at the company's 2012 performance, sales rose 10.2 percent over the prior year. However, same-store sales (stores open over a year) only increased 5.3 percent, as compared to an 8.2 percent increase in 2011.

To the company's credit, its gross margin rose to 33.6 percent from 33.2 percent. Selling, general and administrative expenses -- including depreciation and amortization -- improved to 24.2 percent of sales, as compared to 24.9 percent in 2011. Meanwhile, the company opened 93 new stores and closed two during 2012, as compared to 85 new openings and one closure during 2011.

In its forward-looking guidance, Tractor Supply expects 2013 sales of between $5.07 billion and $5.17 billion, with same-store sales expected to increase 3 to 5 percent. Earnings are projected at $4.32 to $4.40 per share, which includes estimated costs of 6 to 7 cents per share associated with the relocation of its southeast distribution center and its corporate data center. For the full year, the company expects capital expenditures to range between $240 million and $250 million.

The intrinsic value of the shares using a discounted earnings methodology is $140, while the more conservative free cash flow to the firm model yields an intrinsic value of $139. Rarely do the two intrinsic value methodologies match so closely. As previously mentioned, the shares recently closed at $104.05.

My earnings estimate for 2013 is $4.50 per share with a 12-month target price of $118, yielding a potential 13.5 percent capital gain. There is also a 0.80 percent dividend yield.


Lauren Rudd is a financial writer and columnist; write to him at


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