Monday, August 19, 2013

TJX is a good buy ahead of earnings

People are still spending money, but with Obamacare and relatively high gas prices, how much does the ordinary consumer have left to put toward higher end items?

Today, I am going to highlight the biggest off-price apparel and home fashions retailer in the United States. 

They operate in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense).

Highlighting some bits from their latest conference call:

-Strongest year-over-year comparisons for quarterly comp and EPS growth

-EPS grew 13% from the previous year, consolidated comps up 2% from previous year

-Net sales $6.2 Billion, a 7% increase over last year.

- Consolidated inventories on a per store basis including warehouses but excluding e-commerce were down 3%.

-(From CEO) Very few apparel retailers out there that would deliver a 20 basis point gross margin increase in a quarter with one of the coldest winters on record (2012-2013).

They are in a good position moving into the second half of the year and the rest of 2013, seeing enormous near and long term opportunities in their brick and mortar business, supply chain, e-commerce and market share growth potential.

In the first quarter, they bought back $300 million in common stock, amounting to 6.5 million shares. They continue to anticipate to buy back $1.3-$1.4 billion in stock throughout the rest of 2013. The board of directors also approved a 26% increase in the per share dividend in April, making the 17th consecutive year of dividend increases.

They have raised growth potential for Marmaxx, expecting to increase their store count from 2,400 to 2,600. Store growth estimates for HomeGoods have been increased from 750 to 825 in the long term.

Quarter 2 results, which will be released on Tuesday, August 20th, expect to be in the range of $0.61 to $0.63, a 9-13% increase from last year's results of $0.56. Top line growth is expected $6.3 to $6.4 billion on expected comp sales growth of 2-3%.

They are forecasting full year 2014 earnings per share to be $2.70-$2.78 from a full year earnings per share of $2.55 in 2013. Fiscal year 2013 included approximately $0.08 benefit from the 53rd week. Excluding the extra week, fiscal '14 full year expected EPS would be 9-13% increase over the prior year. They also expect comp sales growth of 1-2%.

EPS and revenue growth compared to their peers (Mainly Ross Stores) shows higher EPS growth but slightly lower revenue growth (10.52% v 11.4%). Overall, they are in a pretty good place.

Above, another breakdown of comparisons of TJX to its peers and the S&P.

I arrived at a price target of $53.56 which is 6.10% above Friday, August 16th's close. Most of the data was from Yahoo, but I did use Bloomberg to piece in the rest of the data for items that were not readily available.

Feel free to leave any comments or questions here or tweet me @Peter_Eller10 and I will get back to you as soon as possible.  

Thursday, August 15, 2013

Why I think Deere is a good investment at these levels

After looking through the financial statements and conference call from Deere's quarterly earnings report, I have concluded that the market price of the stock is trading at a discount and is poised to go higher in the long run. I will state my rationale below and present a Discounted Cash Flow analysis to back up my opinion.

Deere & Company (John Deere) operates in three segments: agriculture and turf, construction and forestry and financial services.

-The John Deere agriculture and turf segment manufactures and distributes a line of agricultural and turf equipment and related service parts.

-John Deere construction, earthmoving, material handling and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a range of attachments.

-The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

They are globally diversified having two-thirds of their revenue come from the US and Canada while the other third is from outside of North America. Of their three segments, agricultural equipment makes up 75% of their revenue, while construction and forestry make up 20%; the other 5% comes from financial services.

In Q2 2013, they reported Earnings per share of $2.56 versus estimates of $2.17. Revenue also beat, they reported $9.31 Billion in sales versus estimates of $9.26 Billion. Both earnings and sales were the highest of any third quarter in the company's history, marking their 13th quarter in a row of record profits.

Their Agricultural and Turf segment revenue was up 8% in the quarter, they noted continued strength in North America and South America. Outlook for the European Union remains positive, where production is expected to increase about 7%, citing favorable pork and milk prices from farmers. They expect farm machinery to be lower in 2013 as the after effects of the financial crisis continue to weigh on farmers in the northern part of the EU. Import duties are affecting combine demand in Russia and the surrounding areas.

Their outlook on Brazil remains bullish. They expect a strong soybean crop, with more acres being planted, higher yields, and sustained high crop prices 2013 value of agricultural production in Brazil is expected to increase about 6% over the 2012 level.

North American outlook for tractors and combines continues to be bullish, projecting 5% above 2012, whereas the EU is down 5%, unchanged from 2012. Supportive financing programs and positive farm fundamentals in South America have pushed industry sales of tractors and combines to be up 20%  from 2012 to 2013.  Their tractor market share has grown considerably, along with other heavy farm equipment in the geographical region. 

In looking at a chart of EPS and Revenue growth compared to their peers, Deere is the blue circle. Ideally, any company would want to be in the upper right hand corner at all times (higher EPS and Revenue growth) and as show above, Deere is the closest out of all of its peers.

Above, abother breakdown of comparisons of Deere to its peers and the S&P.

I arrived at a price target of $88.74 which is 7.77% above Wednesday's close. Most of my data was from Yahoo, but I did use Bloomberg to piece in the rest of the data for current assets and liabilities going back farther than three years to get a better average. 

Feel free to leave any comments or questions here or tweet me @Peter_Eller10 and I will get back to you as soon as possible.