When investors think of stocks that have tripled in the last five years, they're likely thinking of companies that are benefiting from hot trends like artificial intelligence (AI) or digital advertising. They're less likely to think of a brick-and-mortar retail chain like Tractor Supply(NASDAQ: TSCO). But Tractor Supply stock has indeed tripled in value over just the last five years.
Tractor Supply is a magnificent company. Its quality has resulted in strong long-term stock performance. And that strong stock performance has brought it to a place where management has concluded it's time for a stock split.
On Dec. 5, Tractor Supply's management announced plans for a 5-for-1 stock split, allowing it to join the ranks of other recent stock-split stocks such as Tesla, Nvidia, Chipotle Mexican Grill, and more. According to management, it's splitting its stock to make the price more accessible.
Tractor Supply stock trades close to $300 per share. After the split, it will trade closer to $60 per share. If you're a shareholder, however, don't panic. If, for example, someone held 100 shares prior to the split, they would own 500 shares after the split. Stock splits neither create nor destroy shareholder value. The total value of the company stays the same, and the total relative size of each shareholder's stake stays the same. Everyone just owns more shares that are each valued at a proportionally lower price.
However, Tractor Supply didn't only announce a stock split on Dec. 5. Management also laid out some long-term goals for the company. For investors excited about the stock split, I believe it's important to remain calm considering splits don't create value. But when it comes to creating long-term value, there was plenty to get excited about in management's vision.
Why Tractor Supply is a great company
An investment thesis for any brick-and-mortar retail business needs to explain why people will shop there in the first place. This is easily explained with Tractor Supply. For starters, it sells a lot of animal feed and large agricultural implements. It's unlikely to lose these sales to an e-commerce platform due to the weight and size of those products.
Moreover, Tractor Supply has nearly 2,300 locations, making it the largest chain in its niche. While other big-box retailers could 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 places with denser populations.
Of course, I'm speaking broadly here. But the point is that Tractor Supply has a defensible position in the market.
Furthermore, many of the things Tractor Supply sells could be considered as non-discretionary items. Over half of its sales are for pets and livestock. Even in hard times, people will pay to take care of their animals. And the expenses of feeding and maintaining your livestock aren't usually avoidable.
Over the last 10 years, Tractor Supply has profitably grown its top line by opening new locations and growing its same-store sales. But it has also used some of its profits to pay a dividend that it has hiked every year for more than a decade. And it has bought back shares, sending its earnings per share (EPS) higher.
There are too many details in the plan revealed this month to mention everything. But at a high level, Tractor Supply's management expects 6% to 8% net sales growth annually 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 through the end of the decade.
Tractor Supply has several initiatives to grow sales. For starters, the company plans to get more into the pet pharmacy business, which is logical considering how large a player it already is in the pet space. This wasn't necessarily news considering the company acquired a pet pharmacy business just last month. But it could lift the chain's sales.
Another way Tractor Supply can grow its revenues is through retail media. It has millions of regular customers and many interact with the brand digitally. The company can sell advertising slots on its digital platforms to boost revenue. Retail giants such as Walmart and Costco have made similar moves and shown that they can work.
Furthermore, Tractor Supply hopes to boost profits by growing sales of its private brands -- a strategy that's worked for retailers such as BootBarn.
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 far 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 several years. That could allow Tractor Supply stock to outperform the S&P 500 over the next five years or more.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has 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 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
