Tractor Supply Company $TSCO

My Investment Checklist

1.      Is the company undervalued?

EV/EBIT: 17.09

EV/Sales: 1.83

Price/Book: 10.9

$TSCO is a well run and remarkably consistent company.  They’ve grown double digits over the last decade and returned meaningful capital back to shareholders.  With that said, Tractor Supply is not the most profitable business and isn’t trading anywhere close to deep value territory.  However if management keeps executing, investors could achieve above market returns with limited downside risk. 

2.      Can I easily explain what the company does?

Yes, they are self-described as the largest rural lifestyle omnichannel retailer in America.  Their sales mix includes; 47% in Livestock & Pets, 21% Hardware & Trucks, 21% Seasonal & Toy, 8% Apparel, and 3% Agriculture.

3.      Does the cash flow statement line up with income statement?

Yes, cashflows have been reliably higher than reported income:

Most of their cashflow went towards share repurchases, capital expenditures, inventories, and dividends paid out.  The build up of inventories seems to be a reoccurring theme in retail right now, in the case of $TSCO that number is up ~24.75% YOY.  Although revenues did increase 8.4% YOY and on a three year stack sales have grown faster than inventories.  For these reasons I wouldn’t be too concerned with future demand, although it’s something to monitor moving forward.

4.      Is the Balance Sheet Healthy?

Total Cash: $530.8M

Total Debt: $3.93B

Current Ratio: 1.44

$TSCO holds little debt relative to their market cap and only paid ~$27M in interest expenses last year.  The company is also a FCF machine and therefore have an extremely sound balance sheet.

5.      How profitable is the business?

Gross Margins: 35%

Operating Margins: 10.7%

Net Margins: 7.8%

These are respectable numbers, especially being in the retail industry.  What’s more impressive is the reliability of earnings.  It wouldn’t be a stretch to call $TSCO the Cal Ripken Jr. of business:

Astonishing results here, which reflect a sticky customer and skilled management team!

6.      What is the company’s growth potential?

10-yr Revenue CAGR: 11.6%

10-yr Operating Income CAGR: 11.58%

10-yr FCF CAGR: 2.14%

Don’t tell the SAAS bros, but you can get double digit growth investing in a blue-collar retailer!  Notwithstanding store growth will undoubtedly slow moving forward.  Conversely $TSCO is opening up more lawn & garden centers at existing locations and expanding their private label merchandise.  Furthermore there should be some organic growth from same store sales and e-commerce.  For these reasons I wouldn’t anticipate growth to decelerate in an impactful way over the next 5 years. 

7.      Is management rewarding shareholders?

$TSCO currently offers investors a 1.97% dividend and have been aggressively repurchasing shares, buying back over $850M (TTM).  Although that number is not sustainable IMO, as they’re only expected to print ~$780M in FCF over the next year.  If we back out SBC that only leaves $700M for shareholders, which equates to a ~3.5% net shareholder yield.  Given Tractor Supply’s growth that’s a good number, and definitely more attractive than buying a 10-yr government bond.

8.      How does the company stack up against their peers?

There’s no publicly traded retailer who focus primarily on Livestock, so it’s probably wise to avoid comparing $TSCO to a $DE or $HD.

9.      What’s the counter argument?

The counter argument is that FCF will be lower with increased capital expenditures.  Additionally the present valuation is implying high single digit growth, which may not happen as $TSCO is nearing saturation.

              These arguments don’t change the long-term thesis IMO.  In fact I would argue that reinvesting back into the business would be the best allocation of capital for shareholders.  $TSCO has historically averaged a ~20% ROIC, so I would much rather prefer increased CAPEX as opposed to a higher dividend.  Furthermore the valuation is actually trading at a slight discount compared to its history, so it’s unlikely the multiple compresses much further. 

10.  Is there something I think the market may be missing?

As mentioned previously $TSCO is pretty much the only farm retailer in the United States and it could be argued they have a mini-monopoly.  This is something that doesn’t show up on any financial statement, but should be considered when estimating intrinsic value.  Furthermore investors have historically been willing to pay a premium for companies that are super predictable.  On the last earnings call, the CEO made the following comments to that point;

“But I think that's the thing that's just the strength of Tractor Supply in our business model is the demand-driven, need-based consistency of the business. If I go back in history, 30-plus years now of positive revenue growth, 30 years of consecutive of positive comp transactions, 29 of 30 of positive sales comp dollars.”

A lot of shit has gone down in the last 30 years and $TSCO hasn’t skipped a beat!  There’s no doubt some special sauce at Tractor Supply, which is driving that resiliency. 

Final Thoughts:

               My base case would be as follows operating income growing at a 10% CAGR for the next 5 years, a 3.5% net shareholder yield annually, and an 18X EV/EBIT exit multiple at the end of year 5.  That works out to a 14.5% IRR, which is formidable but falls just short of my hurdle rate.  Moreover the market is offering higher expected returns elsewhere.  However I will definitely keep watching the stock, as it’s a company that checks pretty much all of my boxes.  

***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours.  This article is intended for educational purposes only and in no way should be interpreted as investment advice