Introduction TJX Companies Inc. (TJX) is the largest North American off-price retailers operating through brand names like Marmaxx, HomeGoods, TJX Canada, and TJX Europe. Its total sales are in excess of $30B over the last twelve months which is above its closest competitors’ revenues: Ross Stores has less than $12B in sales, while Big Lots showed revenues of $5B in the last twelve months. The leading market position is accompanied by strong growth and operating metrics. The three-year CAGR in sales is about 8%, which is higher than the industry’s record of 5.6%, while the net income CAGR for the same time period is about six times higher than the industry’s average. The operating margin is at 12%, which is two percentage points higher than the industry’s average. The net profit margin is 7.5% - also above the industry’s average. As a result, the return-on-assets is approximately 2.0x higher than the industry’s average. The return-on-equity is at remarkable high levels – in excess of 50% - , which is 2.0x higher than the industry’s average. Because of such a high ROE level, the company’s book value is expected to double in less than two years! Moreover, the debt-to-equity ratio is below the industry’s, so there is room to increase debt level to drive returns further: Diagram 1. Source: Morningstar.com The excellent growth and operating metrics helped the company’s stock increase significantly during 2010-2013. However, during the last two years, the stock’s performance has been rather disappointing – it has shown an annual return of about 6.4% (relatively low). Despite that, the overall five-year return has been fantastic – much higher than the Apparel Stores and the S&P 500 Indexes’. Moreover, a modest dividend yield of 1% and a series of future buybacks are a good motivation to buy this stock (check out the five-year dividend and buyback dynamics in Diagram 3). Finally, the company wants to expand its business by adding TradeSecret to its portfolio. TradeSecret is a leading off-price retailer in Australia. New markets mean more opportunities and more risks, as well. Diagram 2. Source: Morningstar.com The stock may be perceived by a few market participants as overvalued because of the rapid historical increase in price (and, therefore, unattractive). Some investors are cautious because of the decreasing revenue and net income growth rates. We would like to provide our own opinion on the stock by valuing it in our DCF model. Diagram 3. Source: data – Morningstar.com, infographics by Societe Financiers DCF Valuation The results of our DCF model are presented below. They shows that, after subtracting the market value of debt, minority interest and adding back cash and investments, the market value of the company’s equity is about $64B. After performing balance sheet adjustments, we arrive at a fair value per share of $93 per share, which is more than 30% higher than the current price (~$71 per share). Diagram 4. Source: data – Morningstar.com, DCF model by Societe Financiers Opinion We issue a BUY recommendation on the stock with an aggressive target price of $100 per share. We believe the stock can reach this price in the next 24 months. Risks related to our opinion Because TJX Companies Inc. operates in different markets in various geographic regions, the company also bears currency risks, interest rate risks, macroeconomic, and geopolitical risks. Since these risks are mostly unpredictable, we recommend investors to hedge their positions using different financial instruments. Our valuation of the company is based on current and medium-term business trends and does not include the probability of a force majeure. On the other hand, by using our Excel model, you can change the key parameters in line with your personal assumptions and expectations. Societe Financiers is an investment research team focused on long-term, long- and short-only ideas. Our research objective is to cover equities in various regions, such as North America, EMEA, Asia, Australia, and Emerging Markets. Readers should consider whether any advice or recommendation in our research articles is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in our research articles and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads.