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Sydnee Gatewood
Sydnee Gatewood
Articles (1368) 

David Rolfe Comments on Tractor Supply

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January 13, 2020 | About:

We added to our long-term holding Tractor Supply (NASDAQ:TSCO) during the quarter, as what we view as largely irrational short-term noise led some investors to take profits on the stock after it had more than doubled in the prior two years. Primarily, we believe the market suddenly decided to trade the stock as an oil stock several months ago, which is interesting on a few fronts, not least because the price of oil has been very steady in the $50s for the past year (and topping $60 early in 2020 on the most recent round of geopolitical concerns). Although the Company has a not-meaningless portion of its stores in oil-producing states (roughly 10% in Texas, for example), we do not view flattish oil price trends as a notable problem. We would note that management did specifically call out the oil-producing regions as a drag on the business in 2016, before we bought the stock, but only after oil had collapsed from over $100 to below $30 from 2014 through early 2016, for a decline of roughly -75%. In the current cycle, the industry is running less than -20% below the 2018 peak. Furthermore, the Texas rig count, which likewise collapsed by roughly -80% in that 2014-2016 period, is running approximately -25% below its 2018 peak today. While rig count over these last two cycles cannot be used as an apples-to-apples comparison, because a rig today is more efficient than a rig five years ago, directionally there is a loose correlation between rig count and employment activity in the industry. So while we agree that a decline in the Texas rig count is not a positive influence on Tractor’s overall business, we also do not view this as a meaningful detractor.

Additionally, and arguably of greater relevance, some investors have been concerned with the Company’s plans to replace its retiring Chief Executive Officer, Greg Sandfort. Tractor Supply’s board announced in August that it had decided not to pursue its prior plan to elevate the Chief Operating Officer to the role of Chief Executive Officer upon Mr. Sandfort’s retirement; within a few months, the Company had announced an alternative replacement for Mr. Sandfort, and we do not believe there will be any change to the very successful long-term corporate strategy that has been developed through the tenures of many senior executives in this Company for approximately fifteen years. We do believe, however, that this was another factor that caused some shareholders to book their solid gains over the past few years

Aside from these two issues, we know any physical retailer will be continually open to shorter-term weather nuances – positive and negative – and the occasional freak-out from the investment world, generally related to Amazon, but occasionally due to other factors, as the market loves to find reasons to dismiss these companies, despite clear evidence that many of them (i.e., Tractor, Best Buy, Walmart, Target) are using their physical store and distribution assets as an advantage versus online competition. As our clients will have noticed over the past several years, this usually leads us to attempt to pick off the higher-quality, growing assets on pullbacks, when valuation is very attractive. That is what we have attempted to do with this latest addition to our Tractor Supply holding.

From David Rolfe (Trades, Portfolio)'s Wedgewood Funds fourth-quarter 2019 shareholder letter.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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