TJX Stock Is Estimated To Be Modestly Overvalued
- By GF Value
The stock of TJX (NYSE:TJX, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $65.64 per share and the market cap of $79.2 billion, TJX stock gives every indication of being modestly overvalued. GF Value for TJX is shown in the chart below.
Because TJX is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 6.71% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. TJX has a cash-to-debt ratio of 0.59, which which ranks in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of TJX is 5 out of 10, which indicates that the financial strength of TJX is fair. This is the debt and cash of TJX over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. TJX has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $37.8 billion and earnings of $1.24 a share. Its operating margin is 7.05%, which ranks better than 68% of the companies in the industry of Retail - Cyclical. Overall, the profitability of TJX is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of TJX over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of TJX is -1.6%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is -35.8%, which ranks in the bottom 10% of the companies in the industry of Retail - Cyclical.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, TJX's ROIC is 10.52 while its WACC came in at 6.64. The historical ROIC vs WACC comparison of TJX is shown below:
In summary, the stock of TJX (NYSE:TJX, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the bottom 10% of the companies in the industry of Retail - Cyclical. To learn more about TJX stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
