This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
Why regional trade/retail can be an exciting space?
Although Elders ($ELD) has been in my portfolio for c.3-years, Tractor Supply ($TSCO) came on my radar 6-9 months ago when Aoris covered them in an article. They summarised some interesting points:
Generally, rural products are poorly serviced by eCommerce partly because their products are bulky & heavy to ship on an order-by-order basis. For Example - Digital is c.4.5% of $TSCO's total revenue
Most of the time the market is fragmented with a relative lack of depth in competition. For Example - $TSCO is 10x larger than the #2 rural store chain
There is a level of uncorrelation with other consumer goods given the nature of their spending not being as discretionary For Example - Australian wool sales/production was unimpacted by GFC
Arguably, because they are the only nearby retail offering they can expand product offering (e.g. widen their niche). For example - $TSCO does not need to be geographically committed to one regional quadrant; it just needs a base level of the population within 15miles of their store
As a consequence, I have explained at a high-level what you should consider in the Aussie rural player $ELD and the US behemoth $TSCO
$ELD - Great business, but it requires patience for a $10ish entry point
Elders have had a material turnaround from a chequered past (notably under Futuris conglomerate). To put this into perspective; just look at the recent P&L vs. retained earnings
$ELD - Earnings of the business today
Today, $ELD has 372 member stores with the following segments Farm Inputs (seeds, fertilisers, AgChem and animal health), Agency (livestock, wool and grain marketing), Real estate & Financial and Feed and processing services
With these diverse drivers of the $ELD business, I tend to simplify it as follows
Retail GM % is the largest (e.g. 50bps is c.$10m) noting some of the recent growth has been volume related, with every $5m of volume adding $1m of GM
AgChem & Fertiliser GM% is the next most important driver (e.g. 100bps is $5m of earnings); noting the Urea prices have been particularly high at the moment
Real Estate GP is +/- 10% is $4-5m with RE
Livestock, whilst many think this is the biggest contributor but it is a medium driver. Cattle are more volume sensitive, vs. sheep which is equal volume/price
Central overhead is very important with 100bps in SG&A accounting for $5m
Obviously, ELD's earnings are going to fall from here, but how much?
Evidence that they're over-earning: in the 1H22 result, a material beat, $ELD specifically said that 12% of growth was due to acquisitions, 46% was delivered by organic means and 42% reflected favourable market tailwinds
In effect, 80% of EBIT growth was seasonal conditions (biggest summer crop in years), strong livestock pricing, buoyant real estate market conditions
Smart M&A and cost cuts could cushion the EBIT reduction: In a less buoyant market; they can cut input costs & make cheap bolt-ons. I haven't assumed that in the below but its an obvious upside
Macro says food inflation will fall: ABARES FY23 forecasts show a modest fall (-2.5%) & the World Bank says food price pressures will subside in 2024. So let's just try Consensus FY24 EBIT is c.$210m; a 9% fall from current levels:
Earnings mean multiple is below the benchmark: Even though trading multiples vs. benchmark are super anecdotal, $ELD has generally traded around it and it is at a real low now
Conclusion: Unfortunately I think $ELD's low multiple doesn't mean it's a "great deal" at $12.5/share. Baking in a 20% margin of safety, I would consider it a worthwhile buy at <$10 based on the following
$TSCO - Similarly this is priced for perfection
$TSCO is more simply a rural lifestyle retailer in the US which operates 2100 stores in 49 states and c.200 Petsense stores in 23 states
As a large-cap company; there is a huge amount of brokers covering this company so I will keep this super simple:
Smallish store count growth: According to MS; they claim $TSCO has a modest capacity to increase store count (based on a similar density of population 130-150k) but this still means 85 stores a year
Larger "Side Lot" growth: They've converted some outside areas to garden which will increase their merchandising area by 4% (over time)
Big member base: $TSCO has a decent loyalty base of (~21mn members). Loyalty customers now represent ~60% of TSCO's sales mix driven by ~2x more trips than the average non-loyalty customer and ~3x the spend. Any meaningful growth in the loyalty additions (c.3.5m p.a.) flows directly through to margin (20% delta in growth rate = 30bps of margin)
Price is pretty full: $TSCO is a lowish growth retailer and it is priced pretty much in line with that level of growth (now 22x Forward earnings)
Conclusion: $TSCO has a strong brand and it is too simplistic to assume that they are a "COVID beneficiary" so earnings will decline dramatically. The issue here is that they trade at 22x earnings & will likely deliver stable 8% EPS growth. As such I am ambivalent about the value proposition; unless Side Lot sales are a game-changer.
Overall - both $ELD & $TSCO are well-run & the regional retail space has strong fundamentals. The smaller size & complexity make $ELD more likely to be mispriced in the market and as such more appealing (even though Aus is a smaller market). This being the case; the repricing of $ELD is not yet sufficient to make it appealing until the c.$10/share or $1.5bn market cap price point
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