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 .
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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.