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Tractor Supply Agrees to Buy Orscheln Farm for $297 Million

Tractor Supply shares rise to a record high following news of the acquisition of competitor Orscheln Farm and Home.
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Tractor Supply  (TSCO) - Get Tractor Supply Company Report shares rose to a record high Wednesday after the country’s largest rural lifestyle retailer announced it was buying competitor Orscheln Farm and Home for $297 million in cash.

Privately held Orscheln operates 167 stores in 11 states across the Midwest. 

Tractor Supply traded Wednesday at $166.13, up 2.6%. The stock has jumped 25% over the last three months as Americans embrace the rural lifestyle during the coronavirus pandemic. The stock hit a record high of $166.55 on Wednesday.

“Tractor Supply’s preliminary estimates indicate the acquisition will be immediately accretive to earnings per share upon closing,” the company said in a statement. “The earnings accretion is anticipated to grow over time as planned synergies are achieved. Tractor Supply intends to fund the acquisition through existing cash on hand.”

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Morningstar analyst Jaime Katz thinks the stock is overvalued, putting fair value at $120. But she likes the company.

“We believe that Tractor Supply has reached critical mass in its consumer segment, which should facilitate consistent operating margin expansion helped by corporate development across arenas, including utilizing better customer attribution data, improved bargaining with vendors, and more sophisticated logistics,” Katz wrote in a commentary this month.

“Investments to improve the Tractor experience (via side-lot expansion in garden and project fusion investments to increase productivity) could constrain near-term operating margin expansion,” she said.

“However, over time, improved gross margin results from strong private-label penetration and better operating expense leverage from scale gains could lead to operating margins that rise marginally every year, leading to 10% long-term metrics, in line with the 10% captured in 2020.”