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Tractor Supply Deserves a Closer Look

October 14, 2011 | About:

Invest E Gator

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Before reading any further, take a moment to stand up and give a good hearty round of applause.

That's for Mr. Jim Wright, chairman and CEO, and all of the folks over at the Tractor Supply Company (TSCO). With year after year after year of such stellar results, accolades are well deserved.

The story here isn't too complicated. Tractor Supply Company has been around for a long time, going back to before World War II, as a mail order catalog merchandiser. However, over the last couple of decades, they have been developing a network of stores to provide more local points for meeting the wants and needs of rural Americans.

The typical image of the government-subsidy-infused farmer might come to mind. Although they are a part of it, think more along the lines of families who appreciate living life in the country. Perhaps they might own a couple of acres with a few horses and some chickens running around. The stores remind me a bit of Ace Hardware, but leaning much more into the spectrum of providing support for the country lifestyle. Lots of interesting things in there like horse and other livestock supplies, gun safes, fencing, mineral licks, work boots, animal traps, huge bags of bird feed, yard care, and all types of tools and hardware imaginable. Not too much in this story for the dweebs over at the big investment houses to get excited about, but the results that this company gets most certainly are!

Over the last 10 years they have gone from 305 retail stores to 1001, revenues are up 428%, net income is up 668%, shares outstanding remain about the same, and the balance sheet has become increasingly strong where in 2001 they had $23 million in debt weighing against $25 million in income, and today their debt is immaterial and they have stashed away a cozy $185 million in cash. Not too shabby if you ask me.

And the good news here is they are not yet done. Stores are still opening and improvements to their distribution system are ongoing. Any investor would be a fool to project the future with unrestrained certainty, but these guys are smart. Their market research has identified 800 more potential locations in the U.S., and I bet they would also even get a warm welcome with our frigid cousins to the North.

If you want to get a good owner/investor understanding of this company, here is what you can do:

1. Read (more like fawn and swoon) through the last 10 years of annual reports and pluck out a few years of proxy statements.

2. Get in the car and drive to some of their stores

3. Pay attention to what the customers are buying. A lot of it is consumable merchandise like horse treats and mineral licks.

4. When you are in the store, pick a random product and pester the staff with questions. Do this to get a good gauge on their customer service.

5. Then, the other reason for doing this is once you get them into question answering mode, drop in a few nonchalant questions about how business is going. Rinse and repeat this same procedure at the next store. Do that to about 100 stores and you have a regional statistical sampling of about 10% of the company. Along with having personally gained an expert-level knowledge of wood pellet heaters, who knows when that is going to come handy, what begins to materialize through this process is a company who has got things pretty well under control. Unexpected and unforeseen events do happen from time-to-time, but the part that has been seen so far is looking good and this is a card in their favor.

6. Someone please come here and shoot me for putting #5 out there for general public consumption.

There is one more interesting aspect of this company that has caught my attention. Along with a relatively reasonable performance-based compensation policy that keeps me from missing sleep at night, if we are looking at a company that is projecting to grow from 1,000 to 1,800 stores over the horizon, plus a very impressive record of same store sales increases, this can't be quantified with precision but the picture looks good. The last 10 years their EPS growth rate has averaged around 23%, with a slight relative fizzle to new store openings in recent years, however, appropriately responded on their part by implementing, and later increasing, dividend payouts.

All things considered, perhaps someone might disagree looking back 10 years from now, but the current $67.50/share today (P/E 26) might be just a wee bit on the pricey side. However, I do not consider them to be relatively overpriced compared to some of the obnoxious valuations seen throughout much of our stock market these days. The advantage here in this situation is that it is all very well understandable, with a good opportunity for the average independent long-term investor to probably get an even better grasp on the happenings of this company than the larger investment houses. The stock market has a tendency to make some wild fluctuations over time and, with a firm in-depth grasp on the happenings of the company, such fluctuations are only opportunities presenting themselves.

About the author:

Invest E Gator
I like to search out good values.

Rating: 3.2/5 (11 votes)

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