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

Tractor Supply Company TSCO, an operator of rural lifestyle retail stores, has seen its stock gain nearly 40 percent over the past three months alone, prompting one Wall Street analyst to recommend a pullback. 

The Analyst

Telsey Advisory Group's Joseph Feldman downgraded Tractor Supply's stock rating from Outperform to Market Perform with a price target boosted from $62 to $83.

The Thesis

Tractor Supply is a differentiated retailer that boasts multiple positive catalysts in 2018, including improvements to oil-impacted markets, inflation and easy comparisons, Feldman said in the downgrade note. But investors should recognize the fact that the company has transitioned to a "mature retailer," which requires a revision to the stock's thesis, he said. 

In the near-term, Tractor Supply should report a "solid" comp growth of 2-3.5 percent in its fourth quarter 2017 and first quarter 2018 earnings reports, Feldman said. But comp comparisons will become difficult in the second quarter of 2018 and should come in closer to the low end of the company's 2-3-percent guidance, the analyst said. In addition, the mid-single-digit store growth rate of around 8 percent seen from 2011 through 2016 will slow to a mid-single-digit rate moving forward, Feldman said. 

Efforts to find new sources of revenue — such as loyalty programs and the launch of the Petsense website — should be seen as another signal that growth in the core business has slowed, according to Telsey Advisory Group. 

Tractor Supply's next 12-month P/E multiple of 20.5x is full, considering expectations for a 4-percent operating income growth rate in 2018 and the company becoming "more mature," Feldman said. A new $83 price target implies a 20x P/E multiple on the analyst's 2018 EPS estimate.

Price Action

Shares of Tractor Supply were trading lower by 2.48 percent at $78.68 at the time of publication Thursday afternoon. 

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