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Should You Buy TJX Before Next Week's Earnings Report?

TJX Companies (NYSE:TJX) will be reporting its Q3 earnings on 17th November and many are expecting the company's shares to move upwards. This doesn't come as a surprise as TJX is a company that has a history of beating earnings estimates.

Earnings History

Oct 14

Jan 15

Apr 15

Jul 15

EPS Est

0.85

0.90

0.67

0.76

EPS Actual

0.85

0.93

0.69

0.80

Difference

0.00

0.03

0.02

0.04

Surprise %

0.00%

3.30%

3.00%

5.30%

(Source: Yahoo Finance)

Let's dig deeper into TJX's financials to find out why its shares do represent a compelling investment opportunity and a lot of the optimism might actually be warranted.

Cash generation

With FCF standing at roughly 6.5% of revenue, TJX is a 'cash cow' and importantly TJX's management has been successful in effectively using the company's free cash. In fact, TJX's CROCI has consistently exceeded 20% and at present it stands at a staggering 33%. So TJX generates around $33 for every $100 of invested capital. As shown below none of TJX's competitors, Kohl's (NYSE:KSS), Target (NYSE:TGT) and Ross Stores (NASDAQ:ROST), have managed to convert as much invested capital into cash.

It's important to assess how much capital a company is using to generate its earnings or, in other words, the value a company is creating for its shareholders. This can be done by measuring the difference between Return on Invested Capital and Working Asset Cost of Capital.

I have calculated TJX's WACC under the following assumptions:

  1. I have set the risk-free rate of return equal to the 10-Year Treasury Constant Maturity Rate of 2.26%.
  2. I have used TJX's five-year average tax rate.
  3. Market risk premium refers to the difference between expected return of the market and the risk-free rate of return. In my model, I have set the required market premium in the following range: 6%-7.5%.
  4. I have used Apparel industry Unlevered Beta to calculate levered beta of TJX.

Details of the model and calculations can be seen below:

...

Inputs Summary

Low

High

Levered Beta

0.88

1.02

Market Risk Premium

6.0%

7.5%

Risk-free Rate

2.3%

2.3%

Cost of Long-term Debt

4.0%

5.0%

Tax Rate

37.0%

37.0%

Debt % of Capital

5.0%

10.0%

Implied WACC Range*

7.3%

10.1%

Selected WACC

8.5%


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