Financial Analysis of Tractor Supply Co.

Your research task and objective is to analyze a firm’s financial reporting information and formulate, using that
analysis, and other information available in the public domain, a quantitative assessment of value.
NOTE: When doing your quantitative work, use the most recent financial reports that were unaffected by
COVID, which for most firms, means a fiscal year that ends no later than the end of January, 2020.
COMPANY: Tractor Supply Co. (TSCO)

  1. Industry Analysis You should first research the industry your firm competes in, including main competitors,
    and other significant industry information. Using information from sources such as the company’s 10-k, news
    services, research outlets, industry databases, etc. You can also use library databases, e.g., Value Line
    Research, which is available to students on-line. Then analyze the industry using the models we learned in
    class, with an emphasis on Porter’s framework.
  2. Business Strategy Next, identify your firm’s business strategy, using constructs discussed in class and the
    text, e.g., low cost (or differentiation); geographical diversification.
  3. Analysis of Core Earnings Next, identify core, and sustainable, revenue and expense elements. Then
    support why you chose to include, exclude, modify, or add to, items that were reported in net income.
  4. Traditional Time Series Analysis of Profitability Next, complete a time-series analysis of profitability. Using
    traditional Dupont decomposition (ROE, ROA, capital leverage, etc.) analyze changes in the performance of
    your firm across time, identifying sources and possible reasons for any change.
  5. Cross-Sectional Analysis of Operational Profitability Next, using comparative analysis of operational
    profitability (NOPAT, NOA, RNOA, etc.), compare the company to one major competitor, again noting any
    differences and explaining the results you find, to the extent possible.
  6. Analysis of Risk Next assess the investment risk of your firm. Components of risk that you should analyze
    include short term solvency, long term solvency risk, systematic risk, bankruptcy risk, earnings manipulation
    risk, risk of dilution from shareholder transactions, and risks associated with the representational faithfulness of
    the reports themselves (e.g., red flags, earnings distortions, etc.) You should conclude this section with an
    estimate of the cost of equity capital, and an explanation supporting this estimate.
  7. Forecasts Next, make and present, a forecast of earnings, free cash flow, residual income, and the balance
    sheet for the forecast period (at least 5 years forward). Then list and develop an explanation for the key
    determinants of your forecast (e.g., projected sales, COGS, SG&A, etc.)
  8. Valuation Next make a valuation estimate (on a per share basis) using the DCF and residual earnings
    valuation models we discussed in class. Then compare these estimates to the price of the shares at the close
    of the fiscal year. If the price differs from your estimates, why do you think they differ? What does the market
    seem to be pricing instead?
  9. Impact of COVID Next consider the impact of Covid on the firm. How much were sales and earnings
    impacted? How much was the price of the common stock impacted by the end of March, 2020 (when the
    S&P500 index fell by about 40%, as compared to prices in late January/early February of that same year)?
    What do you think will likely happen to the company’s performance, the cost of equity capital for the firm, and
    the price of the shares when the pandemic ends? Explain.
  10. Investment Recommendation Given the current price, now, do you think the stock is a buy or sell from
    here? Why?

Sample Solution