We are upgrading Tractor Supply (TSCO) shares to Buy from Hold. TSCO shares are down over 45 percent in the last twelve months and over 22 percent year-to-date. This sell-off was due to difficult macro conditions including higher food and energy prices, weak consumer confidence, and declining home prices. Put simply, consumers have fewer dollars to spend in retail stores.
We believe that Tractor Supply's unique retail concept, store locations, and target customer will help the company through this difficult period for retailers. Our bullish view also comes from the company's aggressive store expansion, expanded merchandise mix, and operating improvements that continue to produce solid sales and earnings growth.
Tractor Supply shares currently trade at just 11.7x our 2008 EPS estimate and 10.1x our 2009 EPS estimate. This valuation is a discount to its historical P/E average of 23.5x trailing twelve month earnings. Given the difficult consumer spending environment, the stock may continue to struggle.
However, we think the shares have now declined to a level that fully discounts weak earnings growth into 2009. At this level, we think upside potential outweighs the risk of further declines in TSCO shares and believe the current price offers investors an attractive entry point. We have a six-month target price of $37, which is about 15x our 2008 EPS estimate.
Read the full analyst report on TSCO
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