We published an update on TJX on May 26, 2021. A copy of the associated Earnings Update report is here.
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6 replies to "Diamonds in the Rough of the Consumer Cyclicals Sector"
Look, no offense, I find your research very interesting and helpful — but I look at your EV/IC vs ROIC and I wonder, “Why aren’t we seeing the names of any of the companies that fall on the graph smack between TJX and Thor?” I mean, they clearly generate higher ROIC than TJX does, and their valuations apparently aren’t sky-high, so it would be nice to know what some of those businesses are as well.
Thanks for your comment. For the purposes of this article, we wanted to highlight companies that had a significant recent track record of growth in addition to their high profitability and cheap valuations, which is why the three stocks featured all have five consecutive years of NOPAT growth. While there are some high-quality companies between TJX and THO on the graph, they don’t have that same track record of growth.
Sam: “If THO can maintain current NOPAT margins (6%) and can grow NOPAT by 7% compounded annually over the next decade, the stock is worth $143/share today – a 31% upside. This combination of strong fundamentals and undervalued stock price earn THO a spot in April’s Most Attractive Stocks Model Portfolio.”
Gee, so 31% in a decade, wow that’s almost 3% a year!!! So why wouldnt I get a CD for 2.9% and have zero risk? Also, when the CD matures, do you think it will have a lower or **higher** interest rate?
Again: “If TJX can maintain current margins (8%) and grow NOPAT by 6% compounded annually over the next decade, the stock is worth $97/share today – a 20% upside. Add in the 1.6% dividend yield and 22 consecutive years of dividend increases and TJX could be an excellent portfolio addition.”
Maybe you are trying to show the margin of safety with these calculations? If they really have grown NOPAT by 12% over the last 20 yrs, why not use that number? Or, more pertinently, use the average growth over the past 5 yrs, to account for increased competition with Amazon.
But a 20% upside in a DECADE is not very attractive to those with any math skills.
Our DCF is scenario aims to show the appropriate value for a stock today. So what we’re saying here is that the stock is trading 31% below the discounted value of its future cash flows, and there’s the potential for immediate gains if the market values the stock in line with these conservative estimates.
Per my previous response, the 20% upside refers to stock’s present fair value assuming those growth targets, not what it will be worth in a decade.