Tractor Supply Could Be a Barn Burner

As sales at the farm-and-ranch retailer gallop ahead, the stock is bucking expectations

Tractor Supply (TSCO) -- 52-week stock price

By Gene Marcial

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Tractor Supply (TSCO) is a different breed of specialty retailer, and that's probably why it's doing much better than many companies in the retail business. It caters to the lifestyle needs of people in a highly dedicated niche: ranchers and "recreational" farmers. As such, it operates the largest U.S. chain of retail farm-and-ranch stores.

While shares of other retailers are in a slump, those of Tractor Supply, whose 814 stores in 43 states specialize in livestock and pet products, have been tracking higher. They have vaulted from a 52-week low of 26.70 a share on July 11 to 42.31 on Aug. 12. And they are bound to fly higher.

What is unusual is the stock has already exceeded, as of Aug. 12, the price targets of some analysts who had switched their recommendations to buy in mid-July when the stock slumped. For instance, Robert Plaza, an analyst at independent research firm Zacks Investment Research, who upgraded his rating in mid-July to a buy from a hold, had a six-month price target of 40. When the stock hit his target, he switched his rating on the stock back to hold, although he stayed with his earnings estimates for 2008 and 2009.

Nonetheless, the stock is still below its 52-week high of 51.60 on Sept. 17, 2007, and could retrace its way back to that higher level.

Going One Better

Joan Storms, an analyst at Wedbush Morgan Securities, also upgraded her rating in July to a buy from hold, after Tractor Supply posted better-than-expected second-quarter earnings, which she chalked up to the company's "impressive execution on the top and bottom line." Although the stock has already exceeded her 12-month target of 41, she hasn't changed her buy rating.

Storms expects the positive trends in the second quarter will continue. The company managed cost pressures by swiftly implementing expense controls, including minimizing store payroll, new hires, and capital expenditures, "which worked much quicker that we had expected," she says. Despite the pressure on customers from the housing meltdown and credit crunch, Tractor Supply's "program promoting [consumable items] and more functional discretionary products which only Tractor Supply sells, worked well," she notes. Storms increased her earnings estimates for 2008 to $2.52 a share from $2.45 on sales of $2.9 billion, and her 2009 forecast to $2.75 a share from $2.70.

Much of Tractor Supply's success comes from its unique retail concept: It is a one-stop shop for farmers, ranchers, and rural landowners, notes Zacks' Plaza. While livestock and pet products account for 33% of its sales, Tractor Supply's mix of about 15,000 products also includes tools and other hardware items, lawn and garden power equipment, clothing and footwear, truck, trailer, and towing products, and maintenance products for agricultural and rural use.