Tractor Supply Company (TSCO)

Total return at 5 years: 8.8%/year = 5.8% appreciation + 2.9% dividend. The target price ($44) is ex-dividend; the $5 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $39 · Multiples $40) exceeds the market price ($33).

Today — fairly valued: at $33 trades ~17.3% below its value discounted to today (~$40); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($44) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$26.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($33) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (1.6%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.8 bn of owner earnings in year 5 (vs ~$0.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM to 27-Jun-2026 (US$15.751 billion of revenue), already incorporated into XBRL after the 10-Q filed on 06-Aug-2026: no rebase is needed. The year-1 path starts at the midpoint of the FY2026 guidance published on 23-Jul-2026 after the cut (sales +2.5% to +3.5%, comparables (1%) to 0%, adjusted operating margin 8.5%-8.8%, adjusted EPS US$1.90-2.00), not at the historical trajectory of ~7.9% compound annual growth or at the TTM's growth (+4%): the company itself revised its expectations downward and that guidance is the best information available. The bear and bull cases anchor to the extremes of that same guided range (2.5% and 3.5% in year-1 sales). The net margin starts at 6.43% (TTM, already carrying the drag of the second-quarter Petsense impairment) and converges gradually toward ~6.9% in year 5 in the base case, without recovering the FY2022 peak (7.66%), reflecting a partial recovery once the Petsense restructuring is complete (the closure of ~75 stores) but without assuming a full return to pre-slowdown levels. The operating cash margin is shown net of stock-based compensation (20.9% of TTM free cash flow though only 0.4% of revenue), subtracting it from the gross operating flow margin. The projected buyback (~1.0%/year net) was moderated against the revealed historical pace (~1.9%/year FY2022-TTM) because in the trailing twelve months dividends plus buybacks exceeded maintenance free cash flow, funded partly from the balance sheet -- a slower pace is more sustainable going forward.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $44 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $33, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $44 in 5 years plus $5 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $40. Against the current market price ($33), the margin of safety is 17.3% (trades below the maximum → there is margin) and the total return at that price would be 8.8% annually.

• Moderate entry multiple. The current price implies an EV/EBIT of approximately 15× on operating income over the last twelve months; the base-case exit multiple is 13.8×, within the 12-17× band for specialty retail.
• Expected return. Fairly valued with a base-case 5-year CAGR of +9% plus the dividend, supported by margin recovery and the reduction in shares outstanding.
• Decline in the stock. The stock fell, largely due to the July 2026 guidance cut and the same-store sales slowdown.
• Margin of safety. It trades close to intrinsic value, far from the required margin of safety.
• Sensitivity to the exit multiple. Since the entry and exit multiples are similar, the return depends almost entirely on earnings growth rather than speculative multiple expansion.
• Adverse scenario. In the adverse scenario, with weak same-store sales and a multiple compressed to the floor of the band, the return approaches +9%.
• Favorable scenario. In the favorable scenario, with the Petsense restructuring complete and same-store sales reaccelerating, the return reaches +9%.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ! CFROIC backs up the ROIC (73%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Excellent ROIC. Return on invested capital is around 23%, well above the 10% bar, with a business of low fixed capital per store relative to its revenue.
• Cash generation. TTM operating cash flow of US$1,286 million funds store openings, the dividend, and a portion of buybacks, though with elevated capex from the new Nampa distribution center.
• SBC material vs. cash flow. Stock-based compensation equals only 0.4% of revenue but 20.9% of free cash flow; the valuation metric (net income) already expenses it.
• Net margin compression. Net margin has been eroding from 7.66% in FY2022 to 6.43% over the trailing twelve months, reflecting cost pressure and the Petsense drag.
• Capex above D&A. Capex (US$979 million TTM) is nearly double depreciation (US$509 million), reflecting a phase of capital deployment into new stores and the Nampa distribution center.
• Cash conversion. Net income converts reasonably into operating cash flow, with no sign that accounting earnings depend on aggressive estimates or unusual accruals.
• Non-recurring charges. The Petsense impairment and restructuring (US$65.8 million) and VIP Petcare acquisition costs (US$9.5 million) distort the quarter's GAAP results.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Tractor Supply does not report top-level operating segments or segment-level financial KPIs: the 10-K only breaks down product categories as % of sales and store count by banner. The drivers above combine what is available in the filing (store openings, annual same-store sales, dividend, buybacks) to show the growth mechanics without inventing a breakdown the company does not report.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (27-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• FY2026 guidance cut. The company lowered its sales guidance from +4-6% to +2.5-3.5% and same-store sales guidance from +1%/+3% to (1%)/0% on Jul 23, 2026, following a weak second quarter.
• Store openings. The plan to open ~100 Tractor Supply stores per year (~4% additional square footage) sustains unit growth even with weak same-store sales.
• Negative same-store sales. Same-store sales fell 1.5% in the second quarter of 2026, reversing the +1.5% of the prior year, driven by lower traffic (-1.7%) partially offset by ticket (+0.2%).
• Solid historical growth. The sales compound annual growth rate over the past five years was approximately 7.9%, well above current guidance.
• Allivet and VIP Petcare. The acquisitions of online veterinary pharmacy Allivet (Dec 2024) and VIP Petcare expand the animal-care ecosystem, though still at small scale.
• Saturation ceiling. With 2,602 stores already operating, the runway for new store openings eventually narrows, pressuring the durability of unit growth beyond the 5-year horizon.
• Macro sensitivity. The company's own release attributes the weakness to a cooling in rural and big-ticket spending, a cyclical driver outside the company's control.

• Defensible niche. Leading rural lifestyle retailer in the U.S., with 2,602 stores across 49 states and a specialized assortment that general merchandisers do not replicate at the same depth.
• Recurring categories (C.U.E.). Livestock, equine, and farm plus consumables/usables/edibles drive high-frequency repeat purchases, cushioning the cyclicality of big-ticket items.
• Exposure to discretionary spending. Seasonal and big-ticket categories (equipment, tools) are sensitive to the rural spending cycle, as shown by the Q2 2026 same-store sales decline.
• Private-label brands. Private-label brands and exclusive products represent ~30% of sales, supporting gross margin against pricing pressure from general-merchandise competitors.
• Proprietary distribution. 81% of Tractor Supply merchandise is distributed through the proprietary network of 10 centers (~7.8 million square feet), with a new center in Nampa, Idaho, for 2026.
• Broad competition. Competes with general merchandise retailers, home improvement retailers, pet retailers, agricultural cooperatives, and online retailers, without a strong structural entry barrier outside of logistics scale.
• Petsense under restructuring. The closure of ~75 Petsense stores and the associated goodwill impairment reflect a failed execution of the expansion into pets, though confined to ~5% of stores.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)19.7x
• –Liquidity (current ratio)no data
• !Cash quality (CFROIC vs ROIC)CFROIC backs 73% of ROIC
• ✓Value creation (ROIC − 10% bar)+13pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.9x
• !Float / working capitalConsumes cash $0.3 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.4% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Manageable leverage. Total debt of US$2,154 million against equity of US$2,632 million and TTM operating income of US$1,341 million implies moderate leverage for a retailer.
• Limited cash. Available cash of US$232 million is low relative to the scale of the business, leaving little operating cushion outside the available credit line.
• Interest coverage. Operating income amply covers the estimated interest expense (~US$68 million), with no signs of financial stress in debt service.
• Restrictive debt covenants. The credit agreements and senior note indentures (1.75%, 5.25%, 3.70%) contain restrictive and change-of-control covenants disclosed in the 10-K.
• Distribution greater than free cash flow. Over the trailing twelve months, the dividend plus buybacks exceeded maintenance free cash flow, partially funded from the balance sheet; a signal to watch if it persists.
• Leases. The company leases approximately 97% of its stores, a typical operating fixed-cost structure for the sector that is not reflected in financial debt.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Harry Lawton has led since 2020 with prior experience at Home Depot, eBay, and Macy's, a retail and e-commerce profile relevant to the business.
• Low insider ownership. Directors and executives as a group own less than 1% of shares, a modest level of equity commitment relative to the company's scale.
• Capital discipline. Buybacks were reduced from US$560.6 million in FY2024 to US$361.0 million in FY2025, consistent with prioritizing the dividend and capital deployment into stores in a year of lower cash generation.
• Growing dividend. The quarterly dividend rose from US$0.22 to US$0.24 per share between FY2024 and the most recent declaration, though the pace of increases is slowing.
• Withdrawal of the long-term framework. The company discontinued the long-term financial framework presented at its December 2024 Investor Day following below-expectations results.

• Motivated sellers: the July 23, 2026 guidance cut (adjusted EPS -11%) and the Petsense impairment/restructuring triggered an exit by growth-oriented holders, pressuring the price.
• Petsense's non-recurring GAAP charges (goodwill impairment, store closures, VIP Petcare acquisition costs) depress the quarter's reported earnings more than they reflect the business's recurring economics.
• The market extrapolates the recent weakness in same-store sales and discretionary rural spending as a more durable trend than the company's growth history suggests.

Return on capital remains near 23%, well above the 10% bar, and the current entry multiple (~15× TTM earnings) is already within the specialty-retail band -- it is not a deep bargain, but the price appears to discount more structural deterioration than the available evidence suggests.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +4%/year (+20% total): the margin of safety protects the downside. The bull (+14%/year, +89% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Recent guidance cut. Adjusted earnings-per-share guidance fell from US$2.13-2.23 to US$1.90-2.00 (~-11%) on Jul 23, 2026, with the stock falling accordingly.
• Tariffs and imports. Reliance on manufacturers in Asia and Central America exposes the company to rising import costs from U.S. tariff policy.
• New store execution. The plan to open ~100 stores per year carries the risk of cannibalizing existing stores and lower margins until each location matures.
• Cybersecurity. The processing of customer data and electronic payments exposes the company to the risk of a security breach with legal and reputational impact.
• Discretionary rural spending. A significant portion of sales depends on big-ticket categories sensitive to the rural economic cycle, which weakened notably in the second quarter of 2026.
• Petsense not fully resolved. If the Petsense restructuring does not stabilize the business after the closure of ~75 stores, additional impairment charges could follow.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 23% above the 10% bar, but the margin is limited (+17%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 2.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 8% (EBIT/EV) + ROIC 23% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 2% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +0%/yr, bull-scenario ceiling +11%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: cost advantage, efficient scale, intangibles, switching costs → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 2%, within what we project (5%) — the story squares with the numbers.