Tractor Supply had a lukewarm quarter, but the stock could still reach new highs this year.
Improvements in growth outlook and capital returns will drive long-term value.
There are reasons to believe the stock has solid support and potential for growth.
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The price action in Tractor Supply Company (NASDAQ: TSCO) experienced a mild correction earlier this year, and there is a possibility of further decline within a trading range. However, there are positive factors that suggest the stock has a strong foundation and the potential to reach new highs this year and in the future.
Although the Q2 results were ordinary, the company’s Life Out Here strategy has proven successful and now has even more potential. The company has developed new long-term growth plans that are expected to add value for shareholders.
#1 – Tractor Supply Company Delivers Results
The primary reason Tractor Supply Company could achieve new highs this year is its track record of delivering results. Under the leadership of Hal Lawton, the company has made significant advancements and growth in the past 3 years, establishing a strong presence in its target market. This target market consists of rural areas that are underserved by competitors like Walmart (NYSE: WMT), Target (NYSE: TGT), Lowe’s (NYSE: LOW), and Home Depot (NYSE: HD), making it a large and promising market.
Although the Q2 revenue fell short of expectations, the $4.18 billion in revenue is a 7.2% increase compared to the previous year, and last year’s revenue growth was slightly higher. The softness in revenue this year can be attributed to weak seasonal sales, which is not surprising given the current economic conditions and the absence of stimulus funds for big-ticket purchases. However, the company’s margins have improved compared to last year, resulting in a solid bottom line. The GAAP EPS of $3.83 falls a bit short of the consensus estimate but still represents an 8.5% increase compared to the 7.2% growth in revenue. Savings made at the gross level were offset by higher SG&A expenses.
The company’s guidance for future growth is also slightly below expectations, but it still supports the overall market.
#2 – Tractor Supply Company Raises Its Growth Target
Tractor Supply Company has increased its growth outlook. Initially, the company aimed to have 2,800 store locations, but it has now raised the target by 200 locations, representing a 7% increase. With 2,181 stores currently open, this new growth outlook is a 40% increase from the current level and exceeds the previous forecast by 1000 basis points.
This significant increase in the long-term revenue and earnings outlook is likely to generate positive conversations among analysts and result in higher price multiples. Additionally, the company plans to accelerate its growth in 2024, making it a transition year.
The company aims to open 90 new stores annually starting in 2025 and will utilize a sale-leaseback arrangement to leverage its existing real estate portfolio.
The strategy is to maintain a steady number of company-owned locations while using the proceeds from sale-leaseback agreements to unlock value and support organic growth.
#3 – Tractor Supply Investors Gain Capital Returns
The company currently pays out about 40% of its earnings and has a solid balance sheet and strong cash flow to support this outlook. Tractor Supply has consistently increased its dividend distribution for 14 consecutive years and has the potential to become a Dividend Aristocrat.
In terms of share repurchases, the company bought back 0.7 million shares for $153.9 million during the quarter, effectively doubling the dividend payout.
#4 – The Analysts Like Tractor Supply Company
Analysts generally have a positive view of Tractor Supply Company and expect it to trade higher. Although there have been recent revisions to price targets and a downgrade after the latest release, the consensus remains near the all-time high. It is possible that the stock may be constrained at this all-time high level until later in the year, but an upward bias is anticipated.
The post-release price action aligns with this outlook and shows support at a critical level. The stock has found support at $217 and is supported by the short-term moving average, which could potentially drive it higher.
Before considering Tractor Supply, it might be helpful to know that usafinancetrends keeps track of Wall Street’s top-rated analysts and their stock recommendations. While Tractor Supply currently has a “Moderate Buy” rating among analysts, there are other stocks that these analysts believe are better options.