When investors think of stocks that have tripled in the last five years, they probably think of companies benefiting from hot trends like artificial intelligence (AI) or digital advertising. You are less likely to think of a brick and mortar retail chain as such Supply of tractors (TSCO 0.06%). But Tractor Supply stock has actually tripled in value in just the last five years.
Tractor Supply is a great company. Its quality has resulted in strong stock performance over the long term. And that the stock’s strong performance has brought it to a point where management has concluded that it’s time for a stock split.
On December 5, Tractor Supply management announced plans for a 5-for-1 stock split, allowing it to join the ranks of other recent stock splits such as Tesla, Nvidia, Chipotle Mexican Grilland more. According to the management, they share their stock to make the price more affordable.
Tractor Supply stock trades near $300 per share. After the split, it will trade closer to $60 per share. If you are a shareholder, however, do not panic. If, for example, someone held 100 shares before the split, he would own 500 shares after the split. Stock dividends neither create nor destroy shareholder value. The total value of the company remains the same, and the total relative size of each shareholder’s stake remains the same. Everyone just owns more shares that are valued at a proportionally lower price.
However, Tractor Supply didn’t just announce a stock split on December 5th. Management has also set some long-term goals for the company. For investors excited about stock splits, I believe it is important to keep calm that splits do not create value. But when it comes to creating long-term value, there was much to be excited about in management’s vision.
Because Tractor Supply is a great company
An investment thesis for any brick and mortar retail business needs to explain why people will buy in the first place. This is easily explained with Tractor Supply. For starters, it sells a lot of pet food and great farming tools. It is unlikely to lose these sales to an e-commerce platform due to the weight and size of those products.
In addition, Tractor Supply has almost 2,300 locations, making it the largest chain in its niche. While other big box retailers may sell some of the same products, Tractor Supply locations tend to be in more rural communities. These communities want and need these products, but big-box retailers are more inclined to open stores in areas with denser populations.
Of course, I am speaking broadly here. But the point is that Tractor Supply has a defensible position in the market.
Also, many of the things that Tractor Supply sells could be considered non-discretionary items. More than half of their sales are for pets and pets. Even in hard times, people have to pay to take care of their pets. And the expenses of feeding and maintaining your livestock are not usually avoidable.
Over the past 10 years, Tractor Supply has profitably expanded its top line by opening new locations and growing its same-store sales. But it also used some of its profits to pay a dividend that has increased every year for more than a decade. And it rebounded the stock, sending its earnings per share (EPS) higher.
Outstanding (quarterly) TSCO Average Diluted Shares data from YCharts.
Here’s what Tractor Supply is aiming for next
There are too many details in the plan revealed this month to mention them all. But at a high level, Tractor Supply management expects 6% to 8% annual net sales growth through 2030, as well as 8% to 11% annual EPS growth. That EPS growth in particular (assuming it hits that target range) could be enough to lift the stock to strong returns by the end of the decade.
Tractor Supply has several initiatives to grow sales. For starters, the company plans to further enter the pet pharmacy business, which is logical considering how big a player it is already in the pet space. This wasn’t necessarily news considering the company acquired a pet pharmacy just last month. But it could raise the chain’s sales.
Another way that Tractor Supply can increase its revenue is through sales media. It has millions of regular customers and many interact with the digital brand. The company can sell advertising slots on its digital platforms to increase revenue. Retail giants like Walmart and Costco they have made similar moves and shown that they can work.
In addition, Tractor Supply hopes to increase profits by increasing sales of its private brands — a strategy that has worked for retailers such as Boot granary.
The point is that many investors will be focused on Tractor Supply’s upcoming stock split as a reason to be excited about the stock. But they would do much better to focus on the underlying business, which has a magnificent history of strong shareholder returns. Management has just laid out a credible plan to grow EPS by double-digit percentages over the next few years. That could allow Tractor Supply stock to surpass the S&P 500 over the next five years or so.