When investors think of stocks that have tripled in the past five years, they probably think of companies that are capitalizing on popular trends like artificial intelligence (AI) or digital advertising. They are less likely to think of a physical retail chain Tractor offer(NASDAQ: TSCO). But Tractor Supply shares have indeed tripled in value over the past five years.
Tractor Supply is a wonderful company. Its quality has resulted in strong stock performance over the long term. And that strong stock performance has brought it to the point where management has concluded that it is time for a stock split.
On December 5, Tractor Supply management announced plans for a 5-for-1 stock split, joining other recent stock splits such as Tesla, Nvidia, Chipotle Mexican Grilland more. According to management, it is splitting its shares to make the price more accessible.
Tractor Supply stock is trading at almost $300 per share. After the split, the price will be closer to $60 per share. However, if you are a shareholder, there is no need to panic. For example, if someone owned 100 shares before the split, they would own 500 shares after the split. Stock splits 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 simply owns more shares, each valued at a proportionately lower price.
However, Tractor Supply didn’t just announce a stock split on December 5. Management also set some long-term goals for the company. For investors who are excited about the stock split, I think it’s important to stay calm as splits don’t create value. But when it comes to creating long-term value, there was plenty to be excited about in management’s view.
An investment thesis for any brick-and-mortar retail business must explain why people shop there in the first place. With Tractor Supply this is easy to explain. For starters, it sells a lot of livestock feed and large agricultural equipment. These sales are unlikely to be lost to an e-commerce platform due to the weight and size of those products.
Moreover, Tractor Supply has almost 2,300 locations, making it the largest chain in its niche. While other big box stores might sell some of the same products, Tractor Supply locations are usually located in more rural communities. These communities want and need these products, but big box retailers are more likely to open stores in places with higher population densities.
Of course I am speaking in broad terms here. But the point is that Tractor Supply has a defensible position in the market.
Additionally, many of the things Tractor Supply sells can be considered non-discretionary items. More than half of the turnover concerns pets and livestock. Even in difficult times, people will pay to care for their animals. And the costs of feeding and maintaining your livestock are usually unavoidable.
Over the past decade, Tractor Supply has profitably grown its revenue by opening new locations and increasing same-store sales. But it has also used some of its profits to pay a dividend that it has increased every year for more than a decade. And it has bought back shares, boosting earnings per share (EPS).
TSCO Average Diluted Shares Outstanding (Quarterly) according to YCharts.
The plan unveiled this month contains too many details to list everything. But at a high level, Tractor Supply management expects annual net sales growth of 6% to 8% through 2030, as well as annual earnings per share of 8% to 11%. In particular, that earnings per share growth (assuming that target is met) could be enough to lift the stock to strong returns through the end of the decade.
Tractor Supply has several initiatives to grow sales. For starters, the company plans to delve more into the pet pharmacy sector, which makes sense considering how big a player it already is in the pet space. This wasn’t necessarily news, as the company acquired a pet pharmacy company just last month. But it could increase the chain’s sales.
Another way Tractor Supply can increase its revenue is through retail media. It has millions of regular customers and many interact with the brand digitally. The company can sell advertising spaces on its digital platforms to increase revenue. Retail giants such as Walmart And Costco have taken similar steps and shown that they can work.
Additionally, Tractor Supply hopes to boost profits by increasing sales of its private labels – a strategy that has worked for retailers such as BootBarn.
The point is, many investors will focus on Tractor Supply’s upcoming stock split as a reason to be excited about the stock. But they would be far better off focusing on the underlying businesses, which have a wonderful history of strong shareholder returns. Management has just laid out a credible plan to grow earnings per share by double digits over the next few years. This could allow Tractor Supply stock to outperform S&P500 in the next five years or more.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, Costco Wholesale, Nvidia, Tesla, Tractor Supply, and Walmart. The Motley Fool recommends Boot Barn and recommends the following options: Short December 2024 put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
This beautiful stock has tripled in just five years and is now Wall Street’s newest stock split company. Originally published by The Motley Fool
