Rural farm and ranch retailer Tractor Supply (Nasdaq: TSCO ) just reported an uninspiring quarter. A few more could cause investors to set the stock out to pasture. But since the stock is still up nearly 26% since early September, now may not be the best time to ante up into the name. Should we keep it on our watch lists?
Net sales for the quarter grew 16.6% to $559.2 million, while same-store sales advanced 2.4% -- up from a 1.8% gain in last year's third quarter. The company cited strength in clothing, footwear, and horse, pet, and animal product lines, offset by weakness in "seasonal" equipment, such as riders and generators. This and higher selling, general, and administrative (SG&A) costs contributed to diluted earnings of $0.44 per share, down from $0.45 last year. Excluding the stock-related expenses, earnings grew a measly 6.7%.
Management offered forward guidance in the quarterly press release -- it expects store comp growth of 2%-3% and diluted earnings of $2.29-$2.30, including $0.14 of stock compensation expenses. Based on the current stock price of $51.50, that's a forward P/E of almost 23.
In other words, quite pricey for a retail company, but Tractor Supply's track record may support such a multiple. Sales have grown at a 22.2% annual clip over the past five years, while earnings have advanced 29.2% and operating cash flow has increased 57.7% each year over that time frame. And while sales growth has slowed to just under 20% annually over the past couple of years, earnings and cash flow have grown closer to 30%. Plus, the company is growing via internally generated funds with negligible long-term obligations.
The quarter was clearly a dud, but using current earnings projections, Tractor Supply will still increase full-year earnings by almost 17%. Again, that's not as high as recent annual results, but a couple of years of double-digit growth would offset paying up for the stock. I also like the company's competitive positioning, as its rural focus keeps it out of the path of big-box retailers such as Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) that sell similar products, though obviously on a much larger scale. This rural strategy has benefited convenience-store operator Casey's General Stores (Nasdaq: CASY ) .
Let's see whether Tractor Supply is able to keep growth chugging along. The shares tend to be volatile, so watch for any move to the downside and an opportunity to pick up the shares back toward their 52-week lows.
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Fool contributor Ryan Fuhrmann is long shares of Tractor Supply and Home Depot but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.