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Stock Screen: Growth Stocks - January 11, 2013
Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Summary and Index that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that ought to continue to do so in the future, such as Agrium (AGU) and Tractor Supply Company (TSCO).
To make our list, a company's annual growth of sales, cash flow, earnings, dividends and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years, which is no easy feat considering that this time span included varying rates of economic growth. Below we highlight some of the stocks from our screen with sound investment
Agrium is a leading producer and marketer of nitrogen fertilizer and potash. The company has three primary operating segments: Retail, Wholesale, and Advanced Technologies. Nitrogen-based fertilizers account for 37% of wholesale sales; Potash, 15%; Phosphate, 16%; and Other, 32%. Has major production facilities in North America and Argentina, and a network of more than 1,250 facilities worldwide.
We look for Agrium to register solid results in the near future. Demand for high-quality seed should be strong during the 2013 growing season, owing to reduced supply (reflecting the domestic drought), high crop prices, and improved genetic offerings. Crop nutrient prices should remain attractive moving forward. Consequently, we anticipate moderate top- and bottom-line gains for the company for 2013. However, we may have to alter our estimates if significant economic weakness occurs.
We view 3- to 5-year industrywide fundamentals as being attractive. Global population growth and increased per-capita spending in developing nations should help boost crop demand. Farmers might well continue to seek improved crop quality and greater yield, which might well boost fertilizer prices. Hence, Agrium appears to be well positioned to capitalize on this trend. Though macroeconomic ambiguities remain a concern, we look for markedly higher sales and earnings per share by 2015-2017.
Agrium has returned capital to shareholders. During the fourth quarter of last year, the company bought back more than 8.7 million shares of common stock. This ought to benefit the bottom line in the forthcoming years, as it provides a level of support. What’s more, healthy dividend growth is expected to continue and the board of directors has boosted the frequency of the payout from semiannual to quarterly, effectively doubling the distribution.
Tractor Supply Company
Tractor Supply Company is the predominant operator of retail farm and ranch stores in the United States. It operates under the Tractor Supply Company and Del’s Farm Supply banners and is three times larger than its five nearest competitors combined. Its niche merchandise selection consists of 16,000 to 19,500 unique products per store, with approximately one quarter of sales being derived from high-margined private label merchandise. Its customer base consists mostly of homeowners with above average incomes and little debt, including recreational farmers and ranchers, as well as those who enjoy the rural, “out here” lifestyle. Product offerings include horse, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal items including lawn and garden goods and power equipment, maintenance products and work/recreational clothing and footwear. It operates approximately 1,150 stores in 45 states. These outlie major metropolitan areas and are generally in rural communities.
Tractor Supply boosted its bottom-line guidance for the year just ended. This reflected a third-quarter sales increase of nearly 3%, driven primarily by continued gains in consumable, usable, and edible (CUE) products. These are largely animal and pet-related items. Although this figure might seem modest relative to last year’s comparable period (11.5%), it came despite unfavorable September weather. We believe that Tractor Supply likely benefited from the sale of emergency-related products during the fourth quarter, reflecting Hurricane Sandy and other weather-related occurrences.
We look for strong growth to continue in 2013. We think customers will continue their conservative buying pattern with the CUE products in the forefront. We forecast some gross margin improvement, while further maturing of recent-year site additions (about 250 units since 2010) would also be a positive. And, better weather conditions, which are very difficult to predict, would lend support to our profit-growth assumptions.
The company has significant room for store expansion 3- to 5-years hence, in our view. Demographic studies indicate the potential for 2,100 units (about 80% above the current total), with the western U.S. and smaller stores (80% of the size of a traditional location) being the most logical real estate opportunities. A healthy balance sheet enables Tractor to add 8% square-footage growth per year. That’s a pace far faster than the average retailer.
At the time of this writing, the author did not have any positions in any of the companies mentioned.