Tractor Supply Company (NASDAQ:TSCO) has mastered its niche. The Brentwood, Tennessee-based retailer of agricultural supplies reported better than expected results for the third quarter. However, the TSCO stock price has just begun to rise off a 50% drop it suffered between June 2016 and July 2017. Now that the stock is moving up again, investors should consider an investment in this profitable and ignored niche.
TSCO Fills a Lucrative, Under-the-Radar Niche
Most people who spend all their time in cities have little familiarity with Tractor Supply. Others may have never heard of it. However, the company operates over 1,600 stores in 49 states. TSCO locates its stores mostly in rural areas, although Tractor Supply stores can often be found in the outer suburbs of large metro areas. Wal-Mart Stores Inc (NYSE:WMT) also used this growth strategy in its first years of expansion. Unlike Walmart, TSCO has never attempted to operate in a large city or internationally.
The company’s mission explains why. Tractor Supply describes itself as a “rural lifestyle retail store.” The company started out as a mail-order provider of tractor parts. Today, it sells pet supplies, animal feed, work clothing, power tools and other supplies. Like its suburban counterparts Home Depot Inc (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW), TSCO makes customer service a priority. It employs welders, farmers and horse owners on staff who can provide customers with knowledge and resources.
TSCO Sales Are Recovering
Despite TSCO’s reputation as a store more for hobbyists than farmers, both company sales and the fortunes of the farming and energy industries have affected the stock in the past. Still, the company has grown its revenues by almost 10% per year for the last five years. Net income has risen by an average of over 14% per year. Despite this growth, the price-to-earnings (PE) ratio stands at just under 18, lower than average for an S&P 500 stock.
The TSCO stock price stands at around $60 per share. This is down from a high of almost $97 reached in June 2016. This is despite a third-quarter earnings report where the company beat revenue and profit estimates. Profits rose by 7.5% for TSCO stock, and revenue increased by almost 12%. These numbers are slightly below TSCO’s five-year averages. However, this is a large increase from the flat same-store sales in 2016. It was those flat sales that helped cause the 50% decline in TSCO stock last year. However, revenues and TSCO stock are now rising again.
Tractor Supply Moving Into Related Businesses
The lower TSCO stock price may also reflect other growth concerns. With 1,600 stores in the U.S., investors worry prospects for growth could be limited. Going into large cities takes the company outside of its niche and could leave it vulnerable to competition from Lowe’s and Home Depot. Plus, the company has no experience operating outside the U.S.
So far, TSCO has tried expanding into related businesses. In 2016, Tractor Supply acquired Petsense, a pet supplies dealer with about 150 stores. The company’s 2016 annual report claims it can operate 2,500 Tractor Supply stores and 1,000 Petsense stores across the country. No matter the saturation point, growth remains limited.
Foreign Markets Remain Untapped for TSCO Stock
One untapped market remains opening stores outside of the U.S. Selling outside of the U.S. poses risks. Walmart, its counterpart in rural retail, has suffered failures in places like Brazil, China and Germany. However, Walmart enjoyed success in places like Canada and Mexico where the retail cultures are more similar. Walmart and other American companies such as Home Depot who operate outside of the U.S. can serve as a guideline for places where non-U.S. stores could succeed.
Whatever direction the company ultimately takes, investors should consider buying into this segment of the market. TSCO stock trades at a discount of about 40% of its June 2016 high. If revenue and profits continue their current growth pattern, TSCO will likely also rise. Moreover, investment gurus such as Jim Rogers have been predicting a revival in ag for years. The average age of farmers in the U.S. and Australia (a possible future market for TSCO) is 58, indicating a future worker shortage. If this results in the sudden surge in both food prices and an interest in farming/rural living like Rogers predicts, Tractor Supply will be well-positioned to serve the “agricultural hobbyists” that hope to produce their own food.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.