Tractor Supply Company

Tractor Supply Company (NASDAQ: TSCO) is an American retain chain Company, which has been passionate about serving its unique niche, targeting the needs of recreational farmers, and ranchers as well as tradesmen & small businesses. It is involved in the retail sale of products that support the rural lifestyle.

Rationale for Valuation – Expensive at USD 190.50

• Trading near a 52-week high, while on a trailing 12 months, the Company’s Price/Earnings, Price/Cash Flow, EV/Sales and EV/EBITDA multiples are significantly higher than the Speciality Retailers industry multiples, reflecting overstretched valuations.
• In Q1 FY21, the gross and EBITDA margins were lower than the industry median.
• From the technical standpoint, 14-day RSI is near to the over-bought territory, which means that the stock price could decline in the short term.

Key Risks

• The Company is exposed to several operational risks associated with geological and weather conditions.
• The ongoing challenges of the Covid-19 pandemic may increase its operating cost and hamper business activities.
• The market will remain challenging as customers make a fundamental shift towards the online marketplace.
• The Company is also exposed to currency risk due to foreign exchange rate fluctuations.

Q1 FY21 Trading Update (for the quarter ended 27 March 2021, as on 22 April 2021)

• In Q1 FY21, the net sales increased by 42.5% YoY, with comparable store sales of 38.6% YoY. Moreover, the Company had shown a growth in comparable store sales across all geographic regions.
• Gross margin surged by 148 basis points YoY, reflecting a lower depth and frequency of sales promotions, less clearance activity and favourable product mix.
• Net income rose by 116.5% YoY, and diluted EPS increased by 118.3% YoY.
• The Company stated that it is returning USD 314.0 million of capital to shareholders in Q1 FY21, while it paid quarterly cash dividends of USD 60.6 million and repurchased around 1.6 million shares.
• During the quarter, the Company opened 21 new Tractor Supply stores and 2 new Petsense stores. However, it closed 7 Petsense stores in Q1 FY21.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings (NTM) (Illustrative)

Conclusion

In FY21, the Company expects capital expenditures to be in the range of USD 450-550 million, with new store growth of around 80 new Tractor Supply and 10 new Petsense store openings. Further, the share repurchases for FY21 is expected to be around USD 700-800 million. Meanwhile, the Company witnessed a strong liquidity position, with current cash and cash equivalents of around USD 1.15 billion and no amounts drawn on its USD 500 million RCF (revolving credit facility) as of 27 March 2021. Also, E-commerce sales increased triple digits for the fourth consecutive quarter. However, the outlook remains uncertain due to the impact of the Covid-19 pandemic. Currently, the stock is trading near its 52-week high, suggesting that the upside potential might be limited. The stock made a 52-week low and high of USD 99.04 and USD 192.84, respectively.

Based on the factors highlighted above, we believe the stock of Tractor Supply Company is “Expensive” at the closing price of USD 190.50 (as on 27 April 2021), with support from recovery in the trading environment needs to be evaluated at a later stage.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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