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Ross Stores Inc: Cash Flow Valuation Update

|Includes: Ross Stores, Inc. (ROST)

Current Price: ~ $69/share
Projected Yield: ~ .72%

Ross Stores is one of the largest off-price retailers of brand-name apparel and home accessories. The company operates about 1,051 Ross Dress for Less stores and 95 dd's Discounts stores in the United States. Ross Dress for Less offers merchandise at prices that are 20%-60% below the regular prices of most department and specialty stores; dd's Discounts is a similar concept with lower-tier brands and prices that are 20% lower than those at Ross Dress for Less.

Estimated WACC for the firm today is 6.87% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 199
2004 169
2005 149
2006 199
2007 283
2008 117
2009 359
2010 730
2011 474
2012 404

Average Annual Growth FCF: ~ 28%

CAGR FCF: ~ 8%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year

Consensus Forecast Company 5-Year Growth: ~ 13% per year

Internal Growth Rate: ~ 21%

Sustainable Growth Rate: ~ 65%

Scenario 1
Average FCF (2012, 2011, 2010) is $536 million

  • Start at $536 million FCF
  • Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 536
1 606
2 684
3 773
4 874
5 988
Terminal Value 16254

The firm's future cash flows, discounted at a WACC of 6.87%, give a present value for the entire firm (Debt + Equity) of $14841 million. If the firm's fair value of debt is estimated at $186 million, then the fair value of the firm's equity could be $14655 million. $14655 million / 226 million outstanding shares is approximately $65 per share and a 20% margin of safety is $52/share.

Scenario 2

All else being equal,

  • Assume a 5-year growth rate in FCF of 8% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 536
1 579
2 625
3 675
4 729
5 788
Terminal Value 22004
  • Present Value of the entire firm (Debt + Equity): $18554 million
  • Value of Equity: $18368 million or $81/share
  • 20% margin of safety is $65/share

Sources

Morningstar.com

Yahoo! Finance

Ross Stores Inc

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.