Tractor Supply Downgraded; What's A Fair Value For The Stock Now?

Analysts at UBS parted ways with their bullish stance on Tractor Supply Company TSCO, despite the stock's 16-percent decline since the start of 2017. The firm's Michael Lasser downgraded Tractor Supply's stock rating from Buy to Neutral with a price target lowered from $67 to $62.

The downgrade of the rural lifestyle retail chain can be attributed to several factors, including:

1. Ongoing pressure from online rivals.
2. Management may face a prolonged period of incremental spending.
3. The company's growth profile may prove to be slower than previously expected.

But perhaps the most important factor that contributed to the downgrade is expectations for limited margin upside for at least the next few quarters, Lasser argued. Specifically, the company's buy online pick up in store initiative is being well received by customers, but now management will be forced to invest in incremental store labor hours, technology and logistics.

Looking forward, Tractor Supply's earnings growth profile will likely fall in the low-teen range as opposed to prior levels in the high-teen and 20-percent range, Lasser continued. The slower growth rate also implies a premium multiple is no longer appropriate.

Tractor Supply's stock is currently trading at 18x NTM (next twelve months) P/E, which is nearly three times higher than it was trading at three months ago, which is also a premium to other consumable companies with similar EPS growth profiles. As such, a 17x multiple on the analyst's calendar year 2019 EPS estimate is appropriate and implies the risk to reward profile is "fairly balanced."

In Monday's pre-market session, shares of Tractor Supply were down 3.98 percent at $60.77.

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