‘Maxxing’ Out on TJX Companies

| About: TJX Companies (TJX)

TJX Companies (NYSE:TJX) is America’s largest off-price retailer of brand-name apparel and home fashions. TJX offers family apparel through its T.J. Maxx, Marshalls, A.J. Wright, Winners and T.K. Maxx chains. It sells home fashions through its HomeGoods and HomeSense stores. TJX operates 2,600-plus stores in the United States, Canada, the United Kingdom, Germany and Ireland.

In a recessionary world it’s difficult to find companies that have not only weathered the economic storm but that have prospered. TJX is one of those rarities.
FY 2010 (ended Jan 31, 2010) is expected to have come in at about $2.75 /share versus FY 2009’s $2.01 /share. Consumers appear to have traded down to the off-price stores from their higher priced competitors. This was the fourth straight year-over-year improvement in EPS and the 12th in the last 13 FY’s.
TJX pays a $0.12 quarterly dividend for a current yield of 1.25% at today’s quote of $38.45 /share. The dividend has been raised in each of the past 13 years.
Here are their per share numbers from continuing operations as reported by Value Line:

FY
Sales
C/F
EPS
Div.
B/V
Avg. P/E
2003
23.02
1.51
1.08
0.12
2.71
18.2x
2004
26.70
1.80
1.28
0.14
3.11
15.4x
2005
31.02
2.00
1.34
0.18
3.44
17.8x
2006
34.84
2.06
1.29
0.24
4.11
17.9x
2007
38.37
2.49
1.63
0.28
5.05
16.1x
2008
43.57
2.95
1.92
0.36
4.98
14.8x
2009
46.02
3.11
2.01
0.44
5.17
14.6x
2010*
50.00
3.95
2.75
0.47
5.90
11.9x
* FY 2010 data includes Q4 estimates
Consensus views for FY 2011 are now centered around $3.03 - $3.10, making the TJX multiple about 14x last year’s and < 12.7x forward projections. Those are very low P/E’s by historical standards (excepting the crazy market action from late calendar 2008 to early 2009.
TJX has a nice balance sheet and receives Value Line’s ‘A+’ rating for financial strength and VL’s top safety score. They also garner 90th and 95th percentile rankings for "stock price stability" and "earnings predictability" (with 100th being best). Their Beta is low at about 0.85.
If this year’s estimates are on the mark and the multiple rebounds to a still lower-than-normal 14x then TJX shares can rebound to about $42.50. That would represent a 10.3% rise from this afternoon’s price.
My target price seems attainable and perhaps a bit conservative. Standard and Poors sees ‘fair value’ as $44.60 and carries a $44 12-month goal price.
Overall these high-quality shares offer 10% - 15% total returns with above average safety. Not bad, but far from truly exciting.
Here’s a way to play these shares that can leverage that same move into a much bigger one-year return:

Cash Outlay
Cash Inflow
Buy 1000 TJX @ $38.45 /share
$38,450
Sell 10 Jan. 2011 $40 Calls @ $3.10 /share
$3,100
Sell 10 Jan. 2011 $40 Puts @ $4.90 /share
$4,900
Net Cash Out-of-Pocket
$30,450
If TJX moves up to $40 or better (+ 4.04%) by Jan. 21, 2011:
· The $40 calls will be exercised.
· You will sell your shares for $40,000.
· The $40 puts will expire worthless.
· You will have received $480 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $40,480 in cash.
This best-case scenario would translate any > 4.1% move up into a net profit of $40,480 - $30,450 = $10,030.
$10,030/$30,450 = +32.9% cash-on-cash that was achieved in just 11.5 months.
If TJX remains < $40 on Jan. 21, 2011:
· The $40 calls will expire worthless.
· The $40 puts will be exercised.
· You will be forced to buy another 1000 TJX shares.
· You will need to lay out an additional $40,000 in cash.
· You will have received $480 in dividends.
· You will have no further option obligations.
· You will end up with 2000 TJX shares and $480 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $38.45 purchase price less the $3.10 /share call premium = $35.35 /share (excluding dividends).
On the ‘put’ shares it’s the $40 strike price less the $4.90 /share put premium = $35.10 /share.
Your overall break-even would be $35.23 /share (excluding dividends) and $34.99 /share (including the yield).
TJX shares could fall about 9% without causing a loss on this trade.
Summary:
TJX offers well-defined, but unspectacular, upside over the next year or so. The buy/write combination can turn that 10% - 15% expected total return into a much more exciting 32.9% cash-on-cash profit while providing a 9% extra margin of safety from the trade’s origination price.
Disclosure: Author is long TJX shares and short TJX options.