Pick Up Tractor Supply Shares

We are upgrading Tractor Supply (TSCO) shares to Buy from Hold. TSCO shares are down over 45 percent in the last twelve months and over 22 percent year-to-date. This sell-off was due to difficult macro conditions including higher food and energy prices, weak consumer confidence, and declining home prices. Put simply, consumers have fewer dollars to spend in retail stores.

We believe that Tractor Supply's unique retail concept, store locations, and target customer will help the company through this difficult period for retailers. Our bullish view also comes from the company's aggressive store expansion, expanded merchandise mix, and operating improvements that continue to produce solid sales and earnings growth.

Tractor Supply shares currently trade at just 11.7x our 2008 EPS estimate and 10.1x our 2009 EPS estimate. This valuation is a discount to its historical P/E average of 23.5x trailing twelve month earnings. Given the difficult consumer spending environment, the stock may continue to struggle.

However, we think the shares have now declined to a level that fully discounts weak earnings growth into 2009. At this level, we think upside potential outweighs the risk of further declines in TSCO shares and believe the current price offers investors an attractive entry point. We have a six-month target price of $37, which is about 15x our 2008 EPS estimate.

McGraw-Hill Downgraded to Hold

The outlook for McGraw-Hill Companies, Inc.'s (MHP) Financial Services segment is murky as the mortgage-backed securities and collateralized debt obligation markets have dried up. This segment contributes 45 percent of total company revenue.

Financial Services operating income is shrinking at mid-20's rate and we don't think it will trough until at least the fourth quarter, and then it may likely remain weak through 2009. This weakness should be partially offset by mid-to-high single-digit growth in both the Education segment and Information & Media segment.

Rising mortgage defaults and the resultant drop-off in the U.S. residential mortgage-backed securities market will not likely reverse itself for many quarters. Having been fueled by adjustable rate, interest only and negative amortization loans, we have long thought the housing market was overvalued, and expect the weakness to continue through 2009.

Thus, we expect McGraw-Hill's rating business (Standard & Poor's), which derives much of its revenue from reviewing, and rating of corporate bonds and structured finance deals, to shrink near-term and drive mid-teens drop in operating income for the financial services segment.