Retail Stocks

Ross Stores Inc Valuation – December 2015 Update $ROST

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Ross Stores Inc (ROST) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Ross Stores, Inc. is an off-price retailer of name brand and designer apparel, accessories, footwear, and home fashions for the entire family. The Company operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less (Ross) and dd’s DISCOUNTS. As of December 31, 2014, the Company operated 1,210 Ross locations in 33 states, the District of Columbia and Guam, and 152 dd’s DISCOUNTS stores in 15 states. The Ross and dd’s DISCOUNTS stores are supported by five distribution centers. The Ross brand stores offers its products at savings of 20% to 60% off department and specialty store regular prices every day. Ross’ target customers are primarily from middle income households. The dd’s DISCOUNTS stores offers its products at savings of 20% to 70% off moderate department and discount store regular prices every day. Its target customers typically come from households with moderate incomes.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ROST – December 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $22,019,751,313 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.39 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 346.06% Pass
6. Moderate PEmg Ratio PEmg < 20 25.46 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 9.16 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.39 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.58 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ROST value Chart December 2015

EPSmg $2.13
MG Growth Estimate 14.83%
MG Value $81.25
Opinion Undervalued
MG Value based on 3% Growth $30.88
MG Value based on 0% Growth $18.10
Market Implied Growth Rate 8.48%
Current Price $54.22
% of Intrinsic Value 66.73%

Ross Stores Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.07 in 2012 to an estimated $2.13 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.48% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Ross Stores Inc (ROST)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

ROST Charts December 2015

Net Current Asset Value (NCAV) -$0.19
Graham Number $18.04
PEmg 25.46
Current Ratio 1.39
PB Ratio 9.16
Dividend Yield 0.84%
Number of Consecutive Years of Dividend Growth 20

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Oct15
Total Current Assets $2,434,590,000
Total Current Liabilities $1,749,479,000
Long-Term Debt $395,909,000
Total Assets $4,903,771,000
Intangible Assets $0
Total Liabilities $2,509,689,000
Shares Outstanding (Diluted Average) 404,504,000

Earnings Per Share History

Next Fiscal Year Estimate $2.47
Jan15 $2.21
Jan14 $1.94
Jan13 $1.77
Jan12 $1.43
Jan11 $1.16
Jan10 $0.89
Jan09 $0.58
Jan08 $0.48
Jan07 $0.43
Jan06 $0.34
Jan05 $0.28
Jan04 $0.37
Jan03 $0.31
Jan02 $0.24
Jan01 $0.23
Jan00 $0.21
Jan99 $0.18
Jan98 $0.15
Jan97 $0.10
Jan96 $0.06

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.13
Jan15 $1.87
Jan14 $1.62
Jan13 $1.36
Jan12 $1.07
Jan11 $0.83
Jan10 $0.62
Jan09 $0.47
Jan08 $0.40
Jan07 $0.36
Jan06 $0.32
Jan05 $0.30
Jan04 $0.30
Jan03 $0.25
Jan02 $0.21
Jan01 $0.19
Jan00 $0.16

Recommended Reading:

Other ModernGraham posts about the company

Dividend Growth Stocks for the Intelligent Investor – November 2015
Dividend Growth Stocks for the Intelligent Investor – October 2015
Dividend Growth Stocks for the Intelligent Investor – September 2015
19 Best Stocks For Value Investors This Week – 8/29/15
Ross Stores Inc. Analysis – August 2015 Update $ROST

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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