TJX: Good Company Trading At A Decent Price
Summary
- TJX benefits from a similiar "treasure hunt" atmosphere as ROST.
- It's a capable capital allocator as well.
- Shares appear to trade at a pretty good price based on yield and expected earnings estimates.
TJX (NYSE:TJX) is similar to Ross Stores (ROST), in that it provides a treasure hunt-like atmosphere that lures in bargain-conscious shoppers who would otherwise probably just head straight over to Amazon (AMZN). Will this insulate it from Amazon forever? I'm not sure, but it likely at least makes it more resistant than many other retailers that sell things like basic consumer electronics or books.
Return on invested capital analysis
TJX earns very high 'headline" ROIC with a healthy balance sheet.
Like pretty much every retailer, including Ross, it also utilizes a large amount of "off-balance sheet" financing in the form of operating leases, however. These leases are long-term and noncancelable in nature, and if we choose to theoretically capitalize them, we can calculate estimates for an operating lease-adjusted debt-to-equity ratio and ROIC.
First, we need to estimate their fair value, which I've done using the firm's pretax cost of debt as the discount rate.
Now we can inject them into the company's capital structure to calculate an adjusted debt-to-equity ratio.
Considering the impact of the newly capitalized leases paints a much different picture, as TJX's debt-to-equity ratio jumps from only 0.43x to over 2x. This also impacts ROIC.
Next, we can adjust operating profit, or EBIT, to account for lease-related interest and depreciation expenses.
Now taking taxes into account, we can arrive at net operating profit after tax, or NOPAT, and divide it by the previously calculated estimate for the firm's capital base.
After estimating what would happen if we capitalized the firm's operating leases, we can see that the impact would be a full 20% haircut from its impressive 'headline' ROIC. This would also shift the firm's weighted average cost of capital lower, however, which I'll illustrate below (along with a different range of equity costs).
I'd say that TJX still earns wide economic profits (or excess returns above and beyond its cost of capital) even if we theoretically capitalize its off-balance sheet leases, and even if we use an extremely high cost of equity.
Conclusion
I'd say that like ROST, TJX is one of the better retailers out there, due to its ability to consistently generate profits in excess of its cost of capital. This is the evidence of a moat around its economic castle in numbers, and its off-price, discount business model that provides shoppers with the thrill of finding quality merchandise at a great price likely has something to do with this, along with its size-and-scale.
It's maintained an illustrious track record of raising its dividend (over twenty years in fact), and the last increase was by about 25%. We should probably pay attention to the price paid, however, even for such a great dividend grower.
The five-year average price-to-earnings ratio for TJX is about 21.23, while the thirteen-year median multiple is about 19.19 times earnings.
We can see that shares trade right in-between those multiples, so perhaps they are around fair value. Analysts also expect about $4.84 in earnings-per-share for fiscal 2018, which places shares at only about 16.78 times expected earnings for this fiscal year. This is much cheaper than the valuation placed on ROST shares (at about 19 times expected earnings).
TJX's dividend yield of only 1.92% doesn't sound too impressive at first, either, but let's not forget - it's been growing the dividend by a rapid clip. That's also a relatively high yield for TJX shares based on history.
(Please note: the chart below doesn't appear to account for the recent dividend increase, hence the yield of only 1.54%, but it still provides a good snapshot of what TJX shares have tended to yield over the past few decades. Shaded areas show recessions).
The last time shares yielded this much was during the Financial Crisis years. Considering this (in conjunction with the current price in relation to expected earnings) - shares appear to offer a little value here for DGI, in my opinion.
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Comments (12)
Geo
The string of hefty dividend increases is nice. Hoping that continues for years to come. With so many valuations stretched, TJX does appear to fit the definition of being a great company at a fai price.
Long TJX,and still adding.
They usually have a decent amount of picture frames, furniture, dining sets, etc. and it seems to be constantly changing with different SKUs - so I definitely get the "treasure hunt" aspect, since we don't really ever go there for anything specific.