Most Investors Are Ignoring My Top Retail Stock for 2013

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Most industry-leading retailers are household names.

In apparel, there is Gap Inc. ( GPS ) . In consumer electronics, there is Best Buy ( BBY ) . And in home goods, companies such as Home Depot ( HD ) and Wal-Mart (NYSE : WMT) maintain high levels of visibility that fuels interest from consumers and investors.

But behind the scenes, there is a secret retailer that is crushing the competition, seeing huge gains inearnings and jumping higher on the chart. In fact, earnings have been growing so sharply,shares are up almost 100% in just two years. Take a look at the market-beating rally below...

But just because early investors have seen big gains doesn'tmean the growth story is over. With thebullish trend still well in play and management confident,  Tractor Supply (Nasdaq : TSCO)  can continue to grow its store count and still leave plenty of room for investors toprofit .

This little-known industry-leading retailer sells a wide range of products, all the way from consumables such as bales of hay, to larger-ticket items like small tractors, splitters and chainsaws. And with more than 1,150 stores in 45 states and amarket cap of $6.5 billion, Tractor Supply is the largest farm and ranch retailer in the United States.

This strong national presence provides the company with excellent geographicdiversification . But Tractor Supply's real strength is its strategic decision to focus its operations in key rural areas tocapitalize on the secular bullish trend in agriculture. In just the past six months, prices of a number of key agricultural commodities, including corn, beans and wheat, have surged to or near all-time highs. These rising prices have been a boon for farmers, providing them with additional financial resources to spend on capital and consumable goods. That has played perfectly into Tractor Supply's model, providing farmers with a wide range of goods to invest in their farming businesses and spend extracash .

But even though sales and traffic volumes continue to grow, Tractor Supply is turning its attention tomargin expansion, focusing on developing and promoting private-label brands, with an eye to generate 25% of allrevenue from in-house brands. The company is also focused on direct sourcing, a strategy that involves streamliningprocurement from single sources to negotiate morepricing power . Tractor Supply's efforts in both areaswill likely fuel margin expansion and earnings growth.

But as it stands, Tractor Supply is already an earnings powerhouse, beating estimates in each of the past fourquarters by an average of 3.4%, in spite of circumstantial challenges related to adverse weather conditions this summer and fall in the Midwest. Looking forward, analysts are projecting full-year earnings of $3.72 per share for 2012, an impressive 24% increase from last year. In 2013, analysts are projecting earnings of $4.35 a share, a very solid 17% growth projection in spite of generally weak domestic and international economic growth.

This steady earnings growth forecast has supported the company's financial profile, which has a pristinebalance sheet with nolong-term debt and $79 million in cash and equivalents. 

Strong earnings growth has also kept Tractor Supply's valuation in check. Although shares are up 30% in the past year and 92% in the past two years, Tractor Supply's forward price-to-earnings (P/E ) ratio of 21 is directly in line with its 10-year average and only a slight premium to its peer-group average of 17 times.

Risks to Consider: Tractor Supply has seen huge gains in the past year. Although earnings and valuation still look good, high flyers sitting on big gains ore vulnerable toprofit taking and short-term momentum. Tractor Supply has also recently experienced some margin pressure due to competition from other big-box retailers such as Home Depot and Lowes Cos. ( LOW ) .

Action to Take --> Tractor Supply is my top retailstock for 2013. The company is capitalizing on the bullish trend in agriculture, posting impressive gains in earnings and looks attractively valued. It also boasts a pristine balance sheet that will enable it to invest in new store openings and private-label initiatives that will drive margin expansion. And with shares trading at just 21 times projected earnings of $4.35 in 2013, I have Tractor Supply as a buy below $100.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BBY , GPS , HD , LOW , TSCO

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