Buy Tractor Supply Cheap, or Perhaps Even Cheaper

Left to right stocks are those rare companies that consistently grow sales and earnings year after year. Their prices fluctuate just as with other stocks, but investors can feel confident that steadily rising profits will push these stocks higher over time. Tractor Supply Co. has been that kind of company. Its earnings per share (EPS) have established new records every single year since 2009. A nine-year earnings gain of almost 318% sent the stock from near $12 in early 2010 to more than $114 at this year's peak. Recent weakness sent the shares back to a $92.48 close on Dec. 26. That has created a buying opportunity for those wishing to establish positions in this premier operator of rural lifestyle stores. What is Tractor Supply really worth? From 2010 through 2018 the shares fetched an average price-to-earnings (P/E) multiple of 22.5x accompanied by a dividend yield of around 1.02%. TSCO's very best entry points (green-starred below) came at multiples ranging from 13.6x to 21x. The stock's should have sold moments (red-starred) kicked in when valuations became excessive compared with Tractor Supply's historical averages. As of Dec. 26, Tractor Supply was trading at a reasonably cheap 17.6x forward P/E while paying a better-than-typical 1.51% dividend. A true reversion-to-the-mean multiple could send the shares up to $118 or so by the end of next year. Reverse engineering the current dividend rate to a more average 1.02% translates into a $116.67 price target. The goal price shown below assumes just a partial valuation recovery. It would still support a move higher of greater than $10 over the next 12 months. Other research houses have very similar views on TSCO. Morningstar assigns Tractor Supply a rarely seen exemplary steward rating. Morningstar does not provide year-ahead price targets. Even so, Morningstar sees TSCO's present-day fair value almost $5 above the current quote. Yahoo Finance notes Tractor Supply's lower-than-average valuation in projecting an incredibly precise $109.17 price target for the end of 2020. Achieving that goal would provide about 19.5% in total return. No matter who is working the numbers, it appears likely that TSCO will be higher a year or two into the future. Tractor Supply might not be a home run, but it looks like a great bet to provide decent returns with very low downside risk. Situations with well-defined but limited near-term upside make for great option-writing plays. Selling TSCO's Jan. 21, 2022 expiration date puts was bringing in juicy premiums with the stock at $92.48. The table below shows actual pricing for the $90, $95 and $100 strike prices. Worst-case forced purchase prices dropped to a range of $77.80 to $82.40 depending on the strike price employed. Maximum profits, if the options end up expiring worthless, ranged from $1,220 to $1,760 per 100-share commitment. Making $17.60 per share by writing the most aggressive $100 strike price puts would provide the same pop as riding TSCO shares from $92.48 to $110.08. In a margin account with adequate free buying power, that would occur without needing any initial cash outlay. In addition, put writers would get an almost 11% margin of safety, just in case TSCO did not rise as expected. How conservative is this put writing strategy? Break-even points on the $90 and $95 strikes would be either $77.80 or $80.31 per share. Owning TSCO at either of those net purchase prices would have been a winning position 100% of the time over the past 12 months. Better still, implied P/E multiples on those if exercised prices would drop to just 14.8x or 15.3x Tractor Supply's expected 2020 EPS. That would place the shares at about as cheap a valuation as was found during bottoms in 2011, 2017 and 2018. Those were the best three buying moments on TSCO since the dark days of 2009. Buy some TSCO shares, sell some LEAP puts or consider doing both.

Buy Tractor Supply Cheap, or Perhaps Even Cheaper

The retailer's shares may not be a home run, but its steady performance makes it a good bet to turn in decent returns with minimal risk.

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