Tilling the Farm

 | Jul 16, 2013 | 10:00 AM EDT
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Tractor Supply (TSCO) bought the farm last October when a dry planting season hit the company's bottom line. Despite the earnings miss and lowered guidance, I recommended that investors with a long-term investment horizon use the dips to buy more shares.

Since that article, the stock is up 70%. The company is set to reports its second fiscal quarter on July 24, and I think the shares can continue to run. The only retailers I'm really excited about now are those that have differentiated, easily defended business models that are not easily picked off by e-commerce sites. Tractor Supply fits the bill.

Tractor Supply is the only publicly-held, large-scale, retailer serving rural America. While the grain and feed business is hardly exciting, TSCO is growing its square footage in the high single digits -- while driving same store sales in the mid single digits. It's a powerful cocktail that drives revenue and earnings per share.

Over the last five years, the company has grown its store base by 321 stores (or 37%), while driving sales 55%. Earnings before interest, taxes, depreciation and amortization have increased from $239 million to $526 million. In the same period, earnings per share have grown 164%.

For the second quarter, analysts are expecting the company to earn $1.71. This does not include a $0.06 charge for expenses related to the relocation of its headquarters and build out of its new distribution center. Revenue is expected to be $1.44 billion with a gross margin of 34.8%. For the year, the consensus forecast is for revenue of $5.14 billion and $4.45 a share. That works out to 10% revenue growth and 13% earnings per share growth for 2013.

Tractor Supply has been able to grow its gross margin by offering an ever-increasing mix of higher margin exclusive brands. Approximately 25% of revenue is from exclusive brands. The company has also expanded its offerings, by adding footwear and a larger selection of dog food. In some locations, the company sells hay and an expanded line of chicken and cattle feed.

Management believes it can fit 2,100 stores in America, up from the current 1,173. The additional stores should continue to fuel the company's growth. I think revenue can grow another 10% next year, which would push revenue over $5.5 billion and EPS over $5.20 a share. I think investors are willing to pay 25x next year's earnings, which would launch the stock into the $135 range by this time next year. Those results aren't chicken feed.

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