The Tractor Supply Company (NASDAQ: TSCO) proves US stocks are bubbling.
On 29 April 2021, Mr. Market paid $190.50 for Tractor Supply (TSCO). Tractor Supply reported $2.792 billion in quarterly revenues and $230.54 million in quarterly operating income on 31 March 2021. Moreover, Tractor Supply had total assets of $7.360 billion and $1.115 billion in cash and short-term investments on 31 March 2021.
Simply put, I think Tractor Supply is not worth $190.50 a share. The company is not making enough money to justify $190.50.
What is Tractor Supply?
The first question many people will ask what is Tractor Supply Company (TSCO)?
Tractor Supply is a small-box retailer that caters what I call the rural-fantasy lifestyle market. Tractor Supply does not sell to farmers. Instead, Tractor Supply sells hardware, pet food, horse stable, lawn mowers, tractors, sporting goods, and other items to rural middle and working-class homeowners who play farm.
To explain, most of Tractor Supply’s customers work in office, retail, or government jobs but spend their weekends, gardening, horseback riding, and tending their properties. An average Tractor Supply customer is a secretary who keeps a chicken coop and a couple of horses on her 10-acre suburban lot.
A typical Tractor Supply location is in Woodland Park, Colorado. Woodland Park is a Colorado Springs suburb in the mountains in the shadow of Pike’s Peak. There are no real ranches left in Woodland Park.
Instead, most of the town’s residents are in the military (Colorado Springs is an Army and Air Force town) or work for the federal government. Those people make enough money to afford a 20 to 35-acre lot, a modular home, a couple of horses, a chicken coop, and a small barn.
Tractor Supply claims to be the “largest rural-lifestyle retailer” in the United States. The company claims to operate 1,944 Tractor Supply stores in 49 states. In addition, Tractor Supply operates 177 Petsense stores in 23 states. Petsense sells pet food to middle-class families.
How Stimulus Boosts Tractor Supply
Thus, Tractor Supply (TSCO) prospers as the middle class prospers. Notably, Stockrow estimates Tractor Supply had a revenue growth rate of 42.52% in the quarter ending on 31 March 2021.
Notably, middle-class Americans received two federal stimulus payments; one for $600 in January 2021 and another $1,400 check in March 2021. Thus, Tractor Supply’s prime class of customers received a $2,000 income boost in the First Quarter of 2021.
Predictably, some of those people spent their stimulus payments at Tractor Supply. Notably, Tractor Supply sells toys people can play with at home, such as lawn mowers, where they will be safe from COVID-19 this summer.
I have to wonder if Tractor Supply’s revenues and quarterly operating income will fall in the Second Quarter of 2021 if there is no new stimulus. However, many middle-class Americans will receive tax refunds in the Second Quarter of 2021.
Consequently, I believe Tractor Supply’s revenues could collapse in the third or fourth quarters of 2021.
Does Tractor Supply Company Make Money?
Tractor Supply Company (TSCO) made money in 2021. For instance, Tractor Supply’s quarterly revenues rose from $1.959 billion on 31 March 2020 to $2.792 billion a year later.
Similarly, Tractor Supply’s quarterly gross profit rose from $610 million on 31 March 202o to $924 million on 31 March 2021. Additionally, the quarterly operating income rose from $124.54 million to $230.54 million in the same period.
Furthermore, the quarterly operating cash flow rose from $83.93 million on 31 March 2020 to $177.12 million on 31 March 2021. Impressively, Tractor Supply’s quarterly ending cash flow rose from $461.47 million on 31 March 2020 to $1.150 billion on 31 March 2021.
Impressively, Tractor Supply’s quarterly financing cash flow fell from $322.63 million on 31 March 2020 to -$268.42 million on 21 March 2021. Thus, Tractor Supply pays off more of its debts.
Conversely, Tractor Supply’s Total Debt grew from $3.388 billion on 31 March 2020 to $3.724 billion on 31 March 2021. Hence, Tractor Supply made money and acquired more debt in 2020.
Tractor Supply is a Dangerous Stock
I consider the Tractor Supply Company (NASDAQ: TSCO) a dangerous stock.
TSCO is dangerous because Mr. Market grossly overvalues it and its value is extremely limited. To explain, the number of lawn tractors you can sell in small towns and suburbs is small.
Notably, many of Tractor Supply’s customers need stimulus payments to buy new tractors. Note the tractors, Tractor Supply Company customers own are tiny toys that bear little resemble to the monstrous machines real farmers use.
Moreover, I think, government handouts drove Tractor’s recent boost. If those handouts end, I think Tractor Supply’s revenues will collapse. Thus, I predict Tractor Supply’s stock will collapse.
One danger to Tractor Supply is that cheap mortgages drive the rural fantasy lifestyle bubble. To elaborate, prison guards, school teachers, store managers, firefighters, professional military, and other lower-middle-class people can afford enormous amounts of cheap land with low-interest mortgages. If mortgage interest goes up, that could end.
A Dangerous Dividend Stock
Another reason Tractor Supply (NASDAQ: TSCO) is dangerous is its dividend. For instance, Tractor Supply paid a 40¢ dividend on 8 December 2020 that rose to 52¢ on 9 March 2021.
In 2020, the dividend rose from 35¢ rose on 9 June 2020. Overall, TSCO offered a $1.67 Last Twelve Months (LTM) dividend and a dividend yield of 0.88% on 29 April 2021.
Hence, Tractor Supply is an attractive dividend stock that is also a value trap. Instead, I consider Tractor Supply an overpriced value trap that will collapse. Tractor Supply is a value trap because it appears to be a value investment but is not.
I predict both Tractor Supply and the rural-fantasy lifestyle bubble will collapse. Consequently, I advise all investors and speculators to avoid the dangerous stock known as Tractor Supply Company (TSCO).