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Finally Cheap Enough? Tractor Supply Company

Tractor Supply Company [NDQ:TSCO] June 30, 2008 close: $29.04

52-week range: $28.01 [Jan. 22, 2008] – $53.55 [Aug. 8, 2007]

 Recreational farming and ranching has been booming in suburban and rural areas of America. Tractor supply serves this market with livestock and pet products, hardware, tools, snow blowers, mowers and other products. Following the acquisition of a competitor in 2002, sales and earning grew dramatically. 2007 saw all-time records in every category yet today’s poor economy has caused TSCO shares to plummet by 57% from an March 2006 high of $67.60 to just $29.04 currently.

Here are the per share numbers* since 2002:

Year …… Sales ….. Cash Flow ….. Earnings ….. Avg. P/E …. Book Value

2007 …. $72.12 …… $3.93 ……….$2.40 ……… 19.9x ………$15.08

2006 …. $58.83 …… $3.31 ……….$2.22 ……… 23.8x ………$14.87

2005 …. $52.44 …… $3.04 ……….$2.09 ……… 22.3x ………$12.11

2004 …. $45.40 …… $2.38 ……….$1.57 ……… 24.1x ………. $9.68

2003 …. $39.39 …… $2.09 ……….$1.45 ……… 19.3x ……… $7.90

2002 …. $33.18 …… $1.51 ……….$0.99 ……… 15.2x ……… $6.25

 *sources: Value Line and MSN Money Central

 Tractor Supply management is guiding to a range of $2.54 – $2.62 but Value Line and Zacks are taking a more conservative stance with 2008 estimates of $2.45 and $2.51 respectively.

 Even the lower estimate makes TSCO’s multiple just 11.8x this year’s and 10.8x 2009’s expected earnings. Compare those to their historical P/Es in the chart above. The price/book value and price/sales are now at levels last seen during 2001’s recession. Investors who purchased during that last economic slowdown saw their shares go from a split-adjusted $2.10/share to $44.90 before the end of 2003.

 Debt is low at just 16% of capital and with total interest coverage of 19x last year. Value Line awards TSCO an “A+” financial strength rating.

 Despite all the positive factors these shares are now offered for a share price that is lower than the lows touched for even one day from July 2003 right through year-end 2007.

Some well known holders [as of March 31, 2008]:

Capital Research and Mgt. …………………. 11.30%

Franklin  Resources ………………………….. 5.99%

AMCAP Fund ……………………………….. 6.76%

Southern Sun Asset Mgt. ……………………. 4.34%

Thomas W. Smith …………………………… 4.09%

Barclays Global Inv. …………………………. 3.21%

Neuberger Berman, LLC ……………………. 3.11%

Vanguard Group …………………………….. 2.88%

Gates (Bill and Melinda) Foundation ……….. 2.68%

 Officers and Directors owned ……………….12.90%

 What would be a reasonable target price for Tractor Supply by year-end 2009? Even a lower than typical 16 multiple on the 2009 estimate of $2.85 leads me to a goal of $45.60 or up 57% from today’s quote.

 Is that achievable? TSCO shares hit peak prices of $44.90 – $67.60 as some point in each calendar year from 2003 – 2007 when fundamentals were well below where they are now. 

 Let’s hope these shares do well as Bill and Melinda may need the money.

 *************************************************************

 If you like Tractor Supply but want a lower risk play… consider this:

 

…………………………………………………..… Cash Outlay ……………. Cash Inflow

Buy 1000 TSCO @ $29.04 …………………. $29,040

Sell 10 Jan. 2010 $30 Calls @ $6.30 ………………………………… $6,300

Sell 10 Jan. 2010 $30 Puts @ $5.70 …………………………………. $5,700

Net Cash Outlay …………………………….. $17,040

 

If TSCO shares are above $30 ( up < 4% from our starting point) on expiration date in January 2010:

 

Your shares will be called (sold) for $30,000.

Your puts will expire worthless (a good thing for you as a seller).

You will have no further option obligations.

You will own no shares.

You will have $30,000 for your cash outlay of $17,040.

 

That’s + 76% profit [cash-on-cash] in just about 19 months on shares that need only be 4% higher than when the position was initiated.

 

Risk?

Break-even on the shares is your $29.04 cost less the $6.30 call premium = $22.74 /share.

Break-even on the puts is the $30 strike price less the $5.70 put premium = $24.30 /share.

 

In a worst case scenario you would be forced to own 2000 shares of TSCO at an average net cost of $23.52 /share. That means these shares could drop 19% from your starting price without incurring a loss.

 

Disclosure: Author owns shares and is short options on TSCO.


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