Bernstein: With Rural Growth Opportunity, Advantage Over Amazon, Tractor Supply Is A Buy

With incomes of farm households rising at a faster rate than the general population, Tractor Supply Company TSCO has one of the best store growth opportunities in retail, according to a new report from Bernstein. 

The Analyst 

Analyst Brandon Fletcher initiated coverage of Tractor Supply Co. with an Outperform rating and $80 price target.

The Thesis

Similar to Dollar General Corp. DG, Tractor Supply benefits from being "sociographically far away from urban disruptors," Fletcher said in a Monday note. (See the analyst's track record here.) 

In an extremely fragmented market, Tractor Supply is the only company with over 5-percent market share in the industry, the analyst said. 

“Tractor Supply Company has one of the most attractive store growth opportunities in retail,” Fletcher said.

“At the current pace of roughly 100 new stores per year, that equates to around 6-percent sales growth from new stores alone. These new stores are a mix between new markets as well as building out more stores in existing markets to better serve customers.”

Hobby farming is thriving with only 10 percent of the company’s customer base coming from full-time farmers, Fletcher said. Tractor Supply faces limited competition in rural markets and, with about 100 new stores in the pipeline each year, the retailer is expected to generate sales growth at a 7-8 percent rate for the foreseeable future, the analyst said. 

An Amazon-Proof Retailer? 

Due to the nature of the products it sells — bulky items with further shipping distances — Tractor Supply may very well be protected from Amazon.com, Inc. AMZN’s retail onslaught, Fletcher said. 

“There are very few retailers left that have real competitive advantages against Amazon and we believe Tractor Supply Company is one of them.”

Tractor Supply benefits by being located in rural areas where it's more expensive for Amazon to ship products with its current capabilities and economic model. Distances between rural households are often significant, and Amazon does not have distribution centers near many rural areas, the analyst said. In fact, it was Amazon’s goal to do the exact opposite and position its distribution centers near densely populated areas.

While there is some overlap between Tractor Supply and Home Depot Inc HD's offerings, the company operates much smaller stores, meaning it can fill the void in many of the small rural communities where it operates, Fletcher said. 

Tractor Supply’s investment spending is expected to plateau and margins are expected to expand in 2019, with EPS rising at a three year, 15-percent compounded annual growth rate, according to Bernstein. 

Price Action

Tractor Supply shares were up 1.3 percent at $65.70 at the time of publication Tuesday afternoon. 

Related Links:

Slowing Growth Leads Tractor Supply Co. Off Track; BofA Downgrades

Tractor Supply Is 'Operating Well,' But Analyst Says Downgrade Necessary

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