In its 13F filing for the second quarter of 2012, Lone Pine Capital disclosed that it held a position of 3 million shares in Tractor Supply Company (NASDAQ:TSCO), a $6.8 billion market cap retailer of lawn and garden items, hardware, farm supplies, and animal health products. Lone Pine is managed by Stephen Mandel, who founded Lone Pine in 1997 after having worked for Julian Robertson at Tiger Management. Lone Pine now has about $17 billion in assets under management and Mandel has become a billionaire on the strength of his stock picking skills (see other stock picks from Lone Pine Capital). The fact that the fund increased its position in Tractor Supply as much as it did- last quarter the fund only owned about 240,000 shares- suggests that Mandel and his team believe it is at a good buy-in point. The stock is up 38% this year and up 16% since the end of June, but it is actually off its highs for the year (which occurred in April and May). We would guess that Lone Pine did quite a bit of buying around $95/share or even higher, and with the stock price currently just above $96 investors have an opportunity to get in at a similar price.
A quick glance at the company’s name would suggest that it is an agriculture play. We’re interested in agriculture- note Harvard Management director Jane Mendillo’s advice to the Delivering Alpha conference to buy natural resources- though given some of the company’s business segments it’s not as pure an investment in that theme as, say, fertilizer companies might be. During the second quarter, 40% of revenue came from livestock and pet products (such as food) with another 25% from gifts and toys and 22% from hardware and tools. Overall, revenue increased 10% compared to the second quarter of 2011, and over the first half of the year revenue was up 15%. Net income rose 34% in the first half of 2012 compared to last year. The company’s first quarter strength should be pinned in part on a mild winter, and the second quarter numbers may have benefitted from good weather as well, but the link to agriculture is probably driving some growth as well and Tractor Supply also increased its store count by about 9% compared to the middle of 2011.
We’ve mentioned the stock’s rise so far this year, and that appears to have captured a good deal of the company’s growth prospects. The trailing price-to-earnings ratio is 27 and the forward P/E is 22, which generally are a bit higher than we would like to see. There’s a good case to be made that Tractor Supply’s revenue mix allows it to benefit from agricultural factors without having as much downside as a pure play- the beta is only 1- but on its own the pricing seems to anticipate higher growth than the sell-side.
Tractor Supply’s best comps are the larger supply retailer Home Depot (NYSE:HD) and farm and construction machinery company John Deere (NYSE:DE). We’d also compare it to Potash Corp. of Saskatchewan (NYSE:POT), primarily a fertilizer company but with an animal feed operation as well, as this would be a more concentrated way to invest in agriculture. Of these three companies, Home Depot’s trailing P/E of 20 is the highest trailing earnings multiple, and forward P/Es are 17, 9, and 11 respectively. John Deere and Home Depot also boasted double-digit percentage increases in earnings last quarter compared to a year ago. All three companies are larger in terms of market capitalization and also pay higher dividend yields. In order for Lone Pine to be backing Tractor Supply, the fund must be rather confident in its evaluation of the company’s growth prospects as we don’t see a plausible value story here compared to its peers.