Ross Stores Inc. Quarterly Valuation – August 2014 $ROST

220px-Ross_Stores_Inc._(logo)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 5 Undervalued Companies for the Defensive Investor with High Dividend Yields.  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 specific look at how Ross Stores (ROST) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Ross Stores, Inc. is an off-price apparel and home fashion chain in the United States. The Company operates two brands of off-price retail apparel and home fashion stores: Ross Dress for Less (Ross) and dd’s DISCOUNTS. Ross offers designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. Its merchandise offerings also include, but are not limited to, small furniture and furniture accents, educational toys and games, luggage, gourmet food and cookware, watches, and sporting goods. As of February 1, 2014, it operated 130 dd’s DISCOUNTS stores in 10 states that features brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices. At February 1, 2014, it operated a total of 1,276 stores, of which 1,146 were Ross locations in 33 states, the District of Columbia and Guam.
ROST Chart

ROST data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $64.69
MG Value $141.01
MG Opinion Undervalued
Value Based on 3% Growth $53.11
Value Based on 0% Growth $31.13
Market Implied Growth Rate 4.58%
Net Current Asset Value (NCAV) -$0.06
PEmg 17.66
Current Ratio 1.31
PB Ratio 6.60

Balance Sheet – 5/3/2014

Current Assets $2,063,000,000
Current Liabilities $1,576,400,000
Total Debt $150,000,000
Total Assets $4,151,600,000
Intangible Assets $0
Total Liabilities $2,076,300,000
Outstanding Shares 211,590,000

Earnings Per Share

2014 (estimate) $4.16
2013 $3.88
2012 $3.53
2011 $2.86
2010 $2.31
2009 $1.77
2008 $1.16
2007 $0.95
2006 $0.85
2005 $0.68
2004 $0.56

Earnings Per Share – ModernGraham

2014 (estimate) $3.66
2013 $3.23
2012 $2.71
2011 $2.14
2010 $1.66
2009 $1.25

Dividend History

ROST Dividend Chart

ROST Dividend data by YCharts

Conclusion:

Ross Stores qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the low current ratio and the high PB ratio, but the Enterprising Investor’s only concern is with the low current ratio.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of The TJX Companies (TJX).  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.66 in 2010 to an estimated $3.66 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 4.58% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return 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.

Disclaimer:  The author did not hold a position in Ross Stores Inc. (ROST) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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