Invest in Simple Businesses - Tractor Supply Company
5 minute analysis
Tractor Supply Company (Ticker:TSCO)
TSCO has a qouted stock price of $83.10 per share and a market cap of $9.6 billion. That means we could buy it for $9.6 billion ;) - but what is the intrinsic value?
Let's check out TSCO on Morningstar
TSCO had $562 million in net income for the year 2019. Capital expenditures for the year were $217 million and the free cash flow was $594 million.
It looks like TSCO is growing revenue between 5 percent to 16 percent, the last 5 years only 5 percent to 9 percent and net income by 5 percent to 10 percent the last 5 years (except 2017 where TSCO had a bad year with -3 percent growth). The captial expenditures (capex) has decreased compared to 2018 by ~20 percent!
The free cash flow increased by more than 40% compared to last year, 2018, and has been very cyclical the last 10 years, 1 year increase, the year after decrease. My calculated annual growth rate of the free cash flow is ~17 percent. My assumptions will be that the free cash flow will grow 15 percent for the next three years; then 10 percent a year for the following three years, and then 5 percent a year after. Futher, let's assume that the business is sold at the end of the year for 10 to 15 times free cash flow plus any excess capital in the business. TSCO has $84 million in cash in the business presently.
In this scenario, we would end up with an annualized return of just under 4 percent, i.e. 3.85 percent - excluding dividends!
The payout ratio has been around 30 percent of the net income and the last 10 years dividend growth was around 25 percent and the last 5 years around 12 percent. In my calculation i use 10 percent growth for the coming 10 years.
So my total return would be $14 billion + $1.6 billion, which sums up to $15.6 billion or an annual average of 5%!
Competition - performance comparison
When I googled Tructor Supply competitors I found a good page (https://craft.co/tractor-supply-company/competitors) which gave me an overview over competitors to TSCO!
Out of the list above, I pick The Home Depot and Lowe as more direct competitors to TSCO, due to that they are more pure retailers then the others!
My absolute favorite key performance indicator is from Joel Greenblatt's book, Return on Capital - which is EBIT/(Net Working Capital + Net Fixed Assets).
I remember from a Greenwald MBA lesson in 2006 with Li Lu, that he used Return-on-deployed-capital , which is more or less the same as Greenwald's calculation above.
There are several similar ratios such as ROIC (on invested capital) or ROCE (on capital employed) plus that you have the more broader ROE and ROA - in this example let's look at a comparison of return on capital and some other metrics!
This is what gurufocus.com gave me as a result and let's interpret the result (now I do it in favor for TSCO):
The SG&A part is 23 percent of the revenue, compared to HD's 18 percent!
I do not see this as a problem, as TSCO is growing and as HD has almost 14x more revenue to share the SG&A cost among!
My absolute favorite key performance indicator is from Joel Greenblatt's book, Return on Capital - which is EBIT/(Net Working Capital + Net Fixed Assets).
I remember from a Greenwald MBA lesson in 2006 with Li Lu, that he used Return-on-deployed-capital , which is more or less the same as Greenwald's calculation above.
There are several similar ratios such as ROIC (on invested capital) or ROCE (on capital employed) plus that you have the more broader ROE and ROA - in this example let's look at a comparison of return on capital and some other metrics!
This is what gurufocus.com gave me as a result and let's interpret the result (now I do it in favor for TSCO):
- Best 10 year top line growth: 12.4 percent
- Best 10 year free cash flow gorwth rate: 20.6 percent
- Best Gross Margin: 34.4 percent
- Best ROIC % (10y Median): 29.8 percent
But to be fair - my first conculsion:
- Same high Return-on-capital (10y median) as HD: 45 percent for HD vs 43 percent for TSCO
Another metric that I like to use to know if something is inexpensive is Earnings Yield - i.e. EBIT/Enterprise Value or to direct compare it to P/E using the inverted EV/EBIT!
Here TSCO is the company with lowest Earnings Yield of 6.06 compared to 6.63 for HD and 7.14 for LOW, remember that TSCO is the fastest growing company of these three in revenue and free cash flow!
As I am a manager in an IT company, I always have to report my gross and operating margins to my CFO - so let's look at these metrics too:
- All three have very similar gross margins, 34 percent for TSCO and HD, 32 percent for LOW
- Operating margin: HD at 14 percent and both TSCO and LOW at ~9 percent - here the question is why - so let's look at it
The latest 10K of TSCO shows the "problem"
I do not see this as a problem, as TSCO is growing and as HD has almost 14x more revenue to share the SG&A cost among!
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