Tractor Supply Faces 'Near-Term Questions'

Credit Suisse has downgraded Tractor Supply Company (NASDAQ: TSCO) to Neutral from Outperform after the company cut its 2016 guidance and guided third quarter below consensus estimates. This suggests lack of visibility around the near-term demand drivers and the EPS growth algorithm.

The company now sees third-quarter comps of -1 percent to 0 percent versus market expectations that were settling at +1–2 percent. For the fourth quarter, the implied comps are +2 percent at the mid-point, a deceleration on a two- and three-year basis. The weaker comps are attributable to traffic, weaker big ticket sales and a decline in units per transaction.

Related Link: Wedbush On Tractor Supply: "Slower Growth Deserves Lower Valuation"

Tractor Supply believes challenges are more broadly macro-based rather than due to unfavorable merchandising, driving about 160 bps decline in full-year comp guidance to 1.0 –1.7 percent versus the prior 2.5–3.5 percent and a 4 percent further reduction in EPS at the midpoint to $3.22 –$3.26 versus the prior $3.35–$3.40.

"If the issues TSCO pointed to are right, there is no reason to believe that there is an immediate rebound, absent very favorable Q4 weather trends," analyst Seth Sigman wrote in a note.

For the fourth quarter, the analyst now expects 2.1 percent growth in comps, resulting 1.3 percent rise for the full year, which would be the lowest since 2009. Sigman expects fourth quarter EPS of $0.92 versus implied guidance of $0.89–$0.95 (7–15 percent year-over-year growth).

The analyst cut his 2016 EPS view to $3.25 from $3.38 and 2017 estimate to $3.58 from $3.86. The analyst also trimmed his target price to $72 from $96.

"While we continue believe in the TSCO growth story and ultimately believe a pullback in this stock could provide an interesting opportunity, we believe this stock will be constrained by lower relative comps vs. the Hardlines group, a key driver," Sigman added.

Shares of Tractor Supply were down 16.35 percent at time of writing, trading at $69.87.

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