Tractor Supply Company (NASDAQ: TSCO)
The Tractor Supply Company is a chain of retail stores that sells products for home improvement, agriculture, gardening, livestock, and pet care for recreational farmers and ranchers, pet owners, and landowners. It was founded as a mail order tractor parts business in 1938 with its headquarters in Tenessee, America but only listed in 1959 on the NYSE. Later. The company went public on the NASDAQ under the ticker symbol TSCO in 1994. Having recently released its second-quarter reports, the Tractor Supply Company has seen an increase in mentions by a huge 121% over the last day, encouraging investors to look into what makes the company so hyped. Shares of the Tractor Supply Company currently trade at $206.95.
Tractor Supply currently trades at 22 times earnings, and with massive dividend potential, steadily improving margins, and a core livestock and pet category it’s a stock you must consider taking a position in. Here’s an explanation of why.
Tractor Supply is currently in its 39th consecutive quarter of double-digit growth, which despite the fluctuations of the market makes it seems like a solid investment.
In March, shares were trading above $240. That's a 2,375% return in about 13 years which means the company has been doing well historically and will likely continue to do so.
Last year, the public gave the retailer $12.7 billion worth of business, versus only $4.2 billion just 10 years earlier.
Management is predicting a record net income this year of over $1 billion, which is not bad for a company with a market capitalisation of just $21 billion.
The company has also posted a year-over-year sales and earnings per share (EPS) growth of 8% and 7%, respectively, for the first quarter of 2022.
Investors have a clear expectation that sales will rise by about 8% in Q2 to stay roughly even with the prior quarter's 8.3% spike.
The company has also seen that its loyalty program has been doing well at an increase of up to 24% year over year with almost 25 million members now. This looks like it could lead to repeat purchases and thus boost sales, revenue and profit.
Tractor supply has also engaged in significant share repurchases which are testament to Tractor Supply's incredible track record of returning cash to shareholders, as it also currently pays a 1.5% dividend. Despite having increased its dividend for 11 consecutive years, the company's payout ratio is still only 28% meaning management could triple its dividend and fund these payments entirely from its net income.
The livestock and pet category for Tractor Supply (accounting for 50% of its total sales in 2021) generated around $6 billion in revenue and is the backbone of the company's operations. The good news is that many of its sales categories, such as pet and livestock maintenance products, aren't exposed to short-term shifts in consumer preferences.
Tractor Supply has done historically well during the Great Recession. average sales per location in 2009 were only 5% lower than in 2007, showing how resilient this business is during tough times.
Despite doing well on so many fronts, it is important to remember that Tractor Supply is not perfect and there are reasons you may not want to take a position in the company just yet. Here are some of them.
Many investors were shocked by Target's Q2 report that described large price cuts and inventory write-down charges as consumer demand pivoted away from many of the categories that had been booming in earlier phases of the pandemic.
Gross margin dropped 30 basis points, which still isn’t that bad considering profitability and net incomes are still solid.
Overall, the outlook for the economy is dreary considering the looming threat of a recession and investors are looking to scale down earnings expectations. Given rising costs, there is a chance that Tractor Supply’s profitability could take a hit in the near future.
Last quarter, CEO Hal Lawton and his team described the selling environment as "highly inflationary and volatile." These challenging trends worsened over the following weeks, so the company might be forced to lower its sales or earnings outlook for 2022. However, Tractor Supply still has a good shot at winning market share and boosting profitability over the coming years, just as it did through earlier phases of the pandemic. Regardless of market conditions, spending on pet care is likely to persist, therefore it might just be a good time to take a position in the company now.
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