Tractor Supply Company Analysis – Initial Coverage $TSCO
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Tractor Supply Company (TSCO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Tractor Supply Company is an operator of rural lifestyle retail stores in the United States. The Company focuses on supplying the lifestyle needs of recreational farmers and ranchers, as well as tradesmen and small businesses. As of December 27, 2014, it operated 1,382 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply and HomeTown Pet. It also operates a Website under the name TractorSupply.com. It offers a portfolio of products, which include equine, livestock, pet and small animal products; hardware, truck, towing and tool products; seasonal products, including lawn and garden items, power equipment, gifts and toys; work/recreational clothing and footwear, and maintenance products for agricultural and rural use. Its products are offered under various brands, which include 4health, Blue Mountain, Countyline, Equistages, Groundwork, Huskee, JobSmart, Dumor, C.E. Schmidt, Paws & Claws, Producer’s Pride and Redstone, among others.
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Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $92.67 |
| MG Value | $97.43 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $36.69 |
| Value Based on 0% Growth | $21.51 |
| Market Implied Growth Rate | 14.06% |
| Net Current Asset Value (NCAV) | $3.78 |
| PEmg | 36.62 |
| Current Ratio | 1.90 |
| PB Ratio | 9.70 |
Balance Sheet – March 2015
| Current Assets | $1,527,000,000 |
| Current Liabilities | $805,000,000 |
| Total Debt | $69,000,000 |
| Total Assets | $2,322,000,000 |
| Intangible Assets | $10,000,000 |
| Total Liabilities | $1,007,000,000 |
| Outstanding Shares | 137,700,000 |
Earnings Per Share
| 2015 (estimate) | $3.01 |
| 2014 | $2.66 |
| 2013 | $2.32 |
| 2012 | $1.90 |
| 2011 | $1.51 |
| 2010 | $1.13 |
| 2009 | $0.82 |
| 2008 | $0.55 |
| 2007 | $0.60 |
| 2006 | $0.56 |
| 2005 | $0.52 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.53 |
| 2014 | $2.16 |
| 2013 | $1.79 |
| 2012 | $1.41 |
| 2011 | $1.08 |
| 2010 | $0.82 |
Dividend History
Free Cash Flow
Conclusion:
Tractor Supply Company qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, short dividend history, and the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.08 in 2011 to an estimated $2.53 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 14.06% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Tractor Supply Company (TSCO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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