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Stock Analyst Update

Investors Like the More-Nimble Tractor Supply

More dynamic merchandising, a faster supply chain, and better customer read-through from opportunities with its loyalty program have driven solid sales and recent share price gains.

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Although our outlook for narrow-moat  Tractor Supply (TSCO) remains favorable, stock price appreciation of more than 35% since July 2017 has brought trading prices closer to our $81 fair value estimate, back into fairly valued territory. We initially believed that investor confidence had waned in response to volatile performance due to weather and weakness in oil-producing and agricultural regions, leading to earnings warnings in four of the seven previous quarters. However, we argued that the business model was not broken and that the categories the company participates in differentiate its prospects from many other brick-and-mortar retailers focusing on the outdoor lifestyle, with a wide breadth of private-label products across a broad swath of rural locations nationally. We think Tractor Supply is taking the right steps to act more nimbly than in the past, with more dynamic merchandising, a faster supply chain, and better customer read-through from opportunities with its loyalty program; this has driven solid comparable-store sales performance over the past two quarters, leading to recent share price gains. Should a meaningful trading discount emerge once more, we would consider building a position in Tractor Supply again.

Our long-term outlook for the company is intact. Over the next five years, we expect average top-line growth of 7%, bolstered by the expansion of the brick-and-mortar footprint along with same-store sales of 3%. We don’t anticipate much in the way of operating margin expansion--to 10.2% by 2021, in line with the three-year historical average of 10.3%--as scale gains are offset by ongoing investments in the business, including the expansion and improvement of the distribution network. This ultimately leads to earnings per share growth that averages above 12% in our forecast.

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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.