Tractor Supply Hanging Around Stage Two Buy Point

August 21, 2012 /

Retail farm and ranch store chainTractor Supply ( TSCO ) has been building a second-stage base since June.

After gapping up July 26 on second-quarter results, the stock has paused to sketch a handle. Volume is quiet in the handle — exactly what you want to see. The potential buy point is 93.77.

On Monday, the stock cleared the buy point intraday, but volume was below average.

As of June 30, the company had 1,135 stores in 45 states. The stores are aimed at recreational farmers and ranchers. Pro farmers account for less than 10% of the customers.

At the July 25 earnings call, Chief Operating Officer Greg Sandfort said 18 stores were opened in the second quarter vs. 16 in the year-ago period. He said the company plans to open 90 to 95 new stores in 2012 “as we continue to expand our footprint into new regions.”

Earnings grew 18% in Q2 as revenue climbed 10%. At first glance, those numbers might seem disappointing. The previous quarter showed EPS growth of 129% on a 22% gain in revenue. However, context adjusts the picture.

Early spring weather pulled some business into Q1 that normally occurs in Q2. Given that weather can affect the timing of sales, Chief Financial Officer Tony Crudele says looking at business for the first half “is the best way to analyze our business and neutralize the sales shift related to the unseasonably warm March weather.”

Sales for the first half of 2012 rose 15% vs. 13% in the first half of 2011.

Q3, however, will pose challenges due to the U.S. drought.

Based on past experience, company executives expect the drought to affect sales growth negatively more than it will affect earnings. Drought-related items carry higher margins, but overall the drought is a negative on sales.

The U.S. drought covers regions that affect about three of every 10 Tractor Supply stores.

The Street expects 16% EPS growth in Q3 on 9% revenue growth.

Tractor Supply began paying a dividend in 2010. The initial, split-adjusted 7 cents a share dividend has nearly tripled. The payout is now 20 cents a share. The annualized dividend yield is 0.9%.


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