“We are reiterating our BUY rating on Tractor Supply Co. (TSCO) and raising our target price from $78 to $84. We believe that the company remains the leading farm and ranch retailer, with favorable near- and long-term growth prospects. To increase gross margins, management is focusing on private-label brands and buying directly from manufacturers.
“To offset potentially weak sales, it has adopted an expense- management program that will help to cut marketing, transportation, distribution and business travel costs. In addition, Tractor Supply is carefully managing inventory. The stock is trading at 24.5-times our revised 2011 EPS estimate, above the five-year average of 18.9. Nevertheless, we think the share price undervalues prospects for lower sourcing costs and increased sales of the company’s private-label brands. Over the long term, we expect the company to increase its store count at a low double-digit pace. We also expect margins and earnings to increase as the company emphasizes more profitable clothing and private-label products. We note that Tractor Supply has few competitors with similar product lines, and that it typically focuses on markets that are too small for Lowe’s (LOW) and Home Depot (HD).”
John Staszak, Argus Weekly Staff Report, 10/31/11