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Margin of Safety Investing
Margin of Safety Investing
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Ross Stores (ROST) Quick Review: A potential investment candidate

September 30, 2010 | About:

Ross Stores is the second-largest off-price retailer of apparel and home accessories in the US, after TJ Max (TJX). I put Ross into the idea pipeline as one of my “legacy” stocks. The company currently trades at ~$54

1- Business Performance Risk (+) and intrinsic returns (+)

Metric Status
FCF / Sales Last twelve months (LTM): 8.1%, at the high end of ROST’s performance over the last 10 years; between 2 and 6% except in 2010 when the company reached 10%
ROE LTM: 45% higher than the company’s performance over the last 10 years (between 23% and 40%) and the five year average of 30%
ROA LTM: 19%, after having ranged between 11% and 17% over the last 10 years
Revenue Growth ROST’s 10-year growth is very consistent between 11 and 13%
Cash distribution to shareholders Ross currently pays a yield of 1.1%, below the S&P 500, with a payout ratio of about 15%.

ROST is a constant purchaser of shares, having bought back 17% of its stocks over the last 5 years
ROST’s performance is good overall but I find the FCF/sales ratio a bit low but it is probably driven by the company’s low margin business. However ROE/ROA’s are a sign of good business performance which is also underscored by the company’s profitable growth over the last 10 years.

In terms of returns to shareholders, ROST pays a small dividend and has done about 3% share buybacks per year while accumulating cash.

Going forward returns could be:

- 1.1% from dividends (using 15% of earnings)

- A minimum growth of 6% (using an ROE of 30%, this would use only 20% of earnings)…

- leaving the remainder (65%) available for repurchases, or another 5% of the stock – based on the current earnings yield of 8%

This leads us to a potential intrinsic return of 12%+, depending on ROST’s ability to grow its top line at a higher rate



2- Balance Sheet Risk (+)

Metric Status
LT Debt / Equity LTM: 0.1x – Ross carries very little debt
Current Ratio LTM: 1.5x vs. historic range of 1.4x to 1.6x
ROST carries very little Balance Sheet risk given its low debt and reasonable current ratio

3- Valuation Risk

Metric Status
Cash Return 10.5%, a high return!
P/E 12.8x, below the company’s 5 year average of 16.6x
The current valuation appears to be quite low at less than 10x Free Cash Flow to enterprise value and a P/E below that of the market’s for a company that has grown consistently at 10%+!

Conclusion

ROST appears to be a potential candidate for continued investment as it offers interesting internal return prospects couple with low balance sheet risks and very attractive valuation. As I will perform a Company Analysis however I will try and compare the company’s FCF/sales to others in the same industry.


Rating: 4.2/5 (9 votes)

Comments

Adib Motiwala
Adib Motiwala - 5 years ago
Good post. Take a look at TJX as well. Very similar company. I am finding values in retailers in general. GME ARO BKE
Margin of Safety Investing
Margin of Safety Investing - 5 years ago
Hello Adib,

I agree with you and have actually looked into TJX, ARO and BKE! You will find all of them under the "Quick Reviews" on my site: http://marginofsafteyinvesting.com. I'd be very happy to see what your thoughts are on these reviews.

I was actually planning to work on a longer analysis of ROST over the weekend.

I had not looked at GME, will definitely had it to my list.

Thank you!

Ben

Adib Motiwala
Adib Motiwala - 5 years ago
Ben,

I had a quick glance at your blog. I like the look of it. You are doing a good job. Keep it up. I will try to read up the reviews.
Margin of Safety Investing
Margin of Safety Investing - 5 years ago
Hello Adib,

Don't hesitate to give me thoughts and feedback - I'd like to hear from my readers.

marginofsafetyinvesting at hotmaill dot com or via comments here on on margionofsafetyinvesting.com

Thank you!

Ben

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