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TJX Companies Inc. – Stock Research Analysis

August 06, 2012 | About:
About TJX (TJX) Companies Inc. — Directly from their website:

“The TJX Companies Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. The Company operates 1,005 T.J. Maxx, 891 Marshalls, and 393 HomeGoods stores in the United States; 220 Winners, 87 HomeSense, and 12 Marshalls stores in Canada; and 338 T.K. Maxx and 24 HomeSense stores in Europe.

Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on TJX Companies shows a slight picture of overvaluation based upon the historical earnings growth rate of 18.6% (orange circle) and a current PE of 20.4 (blue circle). Analysts are forecasting the earnings growth to continue at about 12%, and when you look at the forecasting graph below, the stock appears overvalued, (it’s outside of the value corridor of the five orange lines — based on future growth).

TJX Companies Inc: Historical Earnings, Price, Dividends and Normal PE Since 1998

TJX1.png

Performance Table TJX Companies Inc.

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return; capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 17.5% capital appreciation (green circle), long-term shareholders of TJX Companies Inc, assuming an initial investment of $1,000, would have received an additional $433.68 in dividends (blue highlighting) that increased their total return from 17.5% to 17.8% per annum versus 3.6% (red circle) in the S&P 500.

TJX2.png

The following graph plots the historically normal P/E ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.

TJX3.png

A further indication of valuation can be seen by examining a company’s current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for TJX Companies Inc is 1.41 which is historically high.

TJX4.png

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company’s earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 25 leading analysts reporting to Capital IQ forecast TJX Companies Inc.’s long-term earnings growth at 12% (orange circle). TJX Companies Inc. has low long-term debt at 20% of capital (red circle). TJX Companies Inc. is currently trading at a P/E of 20.4, which is above the value corridor (defined by the five orange lines) of a maximum P/E of 18 (orange arrow). If the earnings materialize as forecast, TJX Companies Inc.’s True Worth™ valuation would be $64.20 at the end of 2017 (brown circle on EYE chart), which would be a 7.7% annual rate of return from the current price (yellow highlighting).

TJX5.png

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in TJX Companies Inc. to an equal investment in 10-year Treasury bonds, illustrates that TJX Companies Inc.’s expected earnings would be 6.3 (purple circle) times that of the 10 Year T-Bond Interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

TJX6.png

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: Long TJX at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

About the author:

FAST Graphs
F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.

F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.

Visit FAST Graphs's Website


Rating: 3.7/5 (13 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 1 year ago


Why do you own TJX when your own figures show it to be overvalued?

TJX has been available at much lower multiples than today's during every one of the past ten years.
FAST Graphs
FAST Graphs - 1 year ago
stockdocx99,

Thanks for reading the article and your question. Although you are correct that we do not believe that TJX is a sound buy here, we also do not believe that it is dangerously overvalued enough for us to sell. Our associate money management firm purchased TJX years ago when, as you pointed out, valuation was compelling. One of the principles that our affiliate operates under is to invest in great businesses at sound valuations and hold for the long term.

Our affiliate has a mantra: Great portfolio managers, like great mountain climbers, understand the principle that in order to get to the highest peak, you must be willing to traverse the occasionally valley along the way. In other words, we are not recommending purchase of TJX at this valuation. However, due to our low cost basis, we are content to own it for the long run.

Furthermore, forecasting valuation is part art and part science. For example, if we were to override TJX’s earnings estimate based on its growth rate over the last five years of 18%, then TJX would be fully valued rather than overvalued. Therefore, we must consider the possibility that consensus estimates may be overly conservative or pessimistic.

FAST Graphs

Dr. Paul Price
Dr. Paul Price premium member - 1 year ago
Your own projections show an expected negative total return through at least the first part of 2014.

I see no reason to hold a stock for at least 18-months hoping I might break even.

TJX sold for $24.47 less than 1 year ago. Risk of decline is high right now.
FAST Graphs
FAST Graphs - 1 year ago
Stockdocx99,

First of all, we need to clarify something important about F.A.S.T. Graphs™. This is a research tool that reports historical earnings and price relationships, or what we refer to as “essential fundamentals at a glance”. In the same vein, our forecasting tools are calculators, and NOT OUR PROJECTIONS, instead they default to consensus estimates provided by Standard & Poor’s Capital IQ. Subscribers have the option to override the forecasting tools that allow them to input to their own calculations or expectations.

In other words, F.A.S.T. Graphs™ are “Tools to think with” that are designed to help prospective investors make smarter decisions. This article indicates that TJX is overvalued, therefore, your interpretation of the future returns on TJX are valid. SEC regulations require investment advisors to disclose positions that they hold when writing articles, etc. We do have an affiliate money management firm that operates under its own investment philosophy. Therefore, we are required to disclose any holdings that that firm has in portfolios.

However, that does not mean that F.A.S.T. Graphs™ endorses their views or philosophies. The F.A.S.T. Graphs™ research tool is philosophy agnostic, providing analysis opportunities for any investment philosophy. In short, we report the information, and the user is free to utilize and interpret that information according to their independent views and beliefs.

Thanks again for your comments,

F.A.S.T. Graphs™
adamcz
Adamcz - 1 year ago
I miss the days when this message board was filled with people who had the confidence to present their ideas in normal first person grammar. I'm giving you a one star vote for choosing to share your idea in the style of a cheesy infomercial, complete with a trademarked name for your graph.

Please leave your comment:


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