Wedbush On Tractor Supply: 'Slower Growth Deserves Lower Valuation'

Wedbush has downgraded Tractor Supply Company (NASDAQ: TSCO) to Neutral from Outperform after the company cut its 2016 outlook and guided third-quarter below consensus estimates.

The company expects comps to likely be negative for the second quarter in a row and third quarter out of the past four, despite an easy comparison. On a two-year stacked basis, Tractor Supply anticipates comps to decelerate 270 bps in the third quarter and a further 150 bps, or so, in the fourth quarter at the midpoint of guidance.

"Even with an extra week in the fiscal year, TSCO now expects 7.9 percent EPS growth at the midpoint in 2016, the third year of EPS growth deceleration. While a number of economic headwinds may be weighing on TSCO near-term, visibility to longer-term mid-high teens EPS growth is more limited," analyst Seth Basham wrote in a note.

The company now sees third quarter comps of -1 percent to 0 percent versus consensus 3.3 percent and Wedbush's prior estimate of 2.0 percent.

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.

Did The Weather Play On Results?

The company's results may have been hurt by consumers deferring purchases of cold-weather merchandise categories such as heating due to hot weather. In addition, forecasts of warmer than average temperatures in September and the next three months further dampen the outlook for the balance of the quarter and the year.

Furthermore, the brokerage noted weakness in agricultural communities is apparent due to three consecutive years of declining farm income to the lowest level since 2009.

Related Link: BTIG Downgrades Tractor Supply Following Outlook On "Sustained Weakness," Stock Topples

"These macro pressures are weighing most on big ticket sales, which we believe are set to decline in 3Q despite an easier comparison than in 2Q," Basham continued.

Valuation, Expectations

Basham cut his 2016/2017 EPS estimate to $3.24/$3.59 from $3.38/$3.92, respectively. The consensus calls for earnings of $3.36/$3.85. The analyst also slashed his price target to $72 from $96.

"With multiple quarters of soft comps on an absolute basis and relative to other home improvement retailers and the home improvement category, TSCO may not only be suffering from a slowdown in underlying demand but also from more limited sales drivers than in recent years," Basham added.

At time of writing, Tractor Supply was down 16.34 percent at $69.88.

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