Value Analysis of TJX Companies Every Investor Should Read

One of Wall Street's biggest winners of the day is TJX Companies, a apparel retail company whose shares have climbed 4.5% to a price of $78.51 -- near its average analyst target price of $77.45.

The average analyst rating for the stock is buy. TJX outperformed the S&P 500 index by 5.3% during today's afternoon session, and by 17.0% over the last year with a return of 2.1%.

The TJX Companies, Inc., together with its subsidiaries, operates as an off-price apparel and home fashions retailer. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

TJX Companies's trailing 12 month P/E ratio is 28.0, based on its trailing Eps of $2.8. The company has a forward P/E ratio of 22.4 according to its forward Eps of $3.51 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer cyclical companies is 24.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

TJX’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for TJX Companies, we obtain a PEG ratio of 2.21, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To gauge the health of TJX Companies's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.

TJX's gross profit margins have averaged 33.0% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 8.0%.

TJX Companies's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2022-01-29 3,057,485,000.0 -1,044,794,000.0 2,012,691,000.0 -49.61
2021-01-30 4,561,889,000.0 -568,021,000.0 3,993,868,000.0 40.46
2020-02-01 4,066,540,000.0 -1,223,116,000.0 2,843,424,000.0 -4.05
2019-02-02 4,088,459,000.0 -1,125,139,000.0 2,963,320,000.0 n/a
  • Average free cash flow: $2,953,325,750.00
  • Average free cash flown growth rate: -4.4 %
  • Coefficient of variability (lower numbers indicating more stability): 27.5 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TJX have received an annualized dividend yield of 1.5% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

TJX Companies's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 16, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11 as of the third quarter of 2022.

With an average P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows with a downwards trend, we can conclude that TJX Companies is probably overvalued at current prices. The stock presents mixed growth indicators because of its average gross margins that are increasing, and an above average PEG ratio. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.