Retail stocks have been on fire lately, and one of the biggest winners has been off-price retailer TJX Companies Inc (NYSE:TJX). TJX stock, which until recently had been stuck in neutral for the better part of the past 3 years, has suddenly come to life.
In less than a month, the stock ran up from about $68 to nearly $78. Strong retail earnings and forthcoming tax reform played a big part in that rally.
But the stock has given up some of those gains. TJX stock has fallen from a high of $77.94 on Dec. 4 to $74 as of Tuesday’s market close.
After a big rally and subsequent sell-off, what is next for the stock?
I think the discount retailer rebounds from here, but $78 seems like a point where TJX stock starts to look fully valued. Consequently, this isn’t a buy-now-and-hold-forever stock. It’s a buy-now-and-sell-later stock.
TJX Has Stable Long-Term Growth Prospects
By now, it’s pretty clear that TJX will able to survive and even thrive in an omni-channel retail world dominated by Amazon.com, Inc. (NASDAQ:AMZN).
While the rest of retail has sputtered over the past several years, off-price retailers like TJX and Ross Stores, Inc. (NASDAQ:ROST) have consistently put up good numbers in the face of competition from Amazon. Namely, comps have been positive, revenues have grown and earnings have trended up. Clearly, demand for off-price retail isn’t at all dampened by the surge in e-commerce.
Because of this, there aren’t many risks to the off-price retail growth narrative in the foreseeable future. Barring some unforeseen dramatic change in retail dynamics over the next several years, TJX will continue to post sales growth in line with historical results. Over the past several years, TJX comps have trended in the 0-5% range while sales growth has trended in the 6-7% range.
This trend will persist, and it’s likely that comps even come in at the high end of that range.
Why? General retail trends are improving. The retail names that were getting killed by Amazon are finally starting to rebound (just look at Macy’s Inc (NYSE:M) stock) amid what appears to be the best holiday season for retailers in recent memory. If this rebound in retail continues, TJX could be looking at super-charged comparable sales growth over the next several years (closer to 5%).
Meanwhile, the margin outlook is also improving. Margins have been under pressure lately due to rising wages and higher supply-chain costs. Pre-tax profit margins have been in decline for a few years now.
But rising labor costs will moderate over the next several years, as wage hikes move into the rearview mirror. Meanwhile, as unit expansion slows, so will increased supply chain costs to support the growing store base. Consequently, margins should be able to move slightly higher over the next several years.
On top of all that, TJX is a huge taxpayer. The company’s effective tax rate hovers around 38%, versus 30% for the S&P 500. Any cuts to the corporate tax rate would be hugely additive to profits.
$78 Is the Price to Watch for TJX
All in all, TJX is a big taxpayer with at least 5% revenue growth potential and slight margin expansion potential.
Over the past 4 years, revenue growth of about 6.5%, slight margin erosion and big buybacks powered 8% earnings growth.
Over the next several years, then, revenue growth of at least 5%, slight margin expansion and big buybacks should power at least 8% earnings growth.
The S&P 500 is trading at 20 times this year’s earnings for 10% growth prospects. That is a 100% growth premium. Because TJX has a bigger tax rate than the S&P 500 and the market is trading higher in anticipation of tax cuts, TJX should trade at a bigger growth premium. Consequently, I’m comfortable with TJX stock trading at 20x this year’s earnings, in line with the market despite slightly lower growth prospects (not counting tax reform).
A 20 multiple on 2017 earnings estimates of $3.93 implies a price target of between $78 and $79 on TJX stock.
Bottom Line on TJX Stock
TJX stock was undervalued before the retail rebound gripped the market. After a 15% rally, the stock shot into fair value territory. Now, it has sold off back to undervalued territory.
I think that means it’s time to buy. With sentiment in retail rebounding and tax reform on the horizon, I don’t see this stock dropping much further.
As of this writing, Luke Lango was long TJX, M, and AMZN.