Ross Stores (ROST) has had a solid decade. During the last ten years, profits have grown 18% a year and the stock’s compounded at 20% a year. Normally, this is a stock I would be buying. But now profit growth is moderating, and the stock is a little overpriced. Sales growth was only 8% last quarter, and profits grew a more moderate 15%. Additionally, same store sales were growing 6-7%, and now are expected to increase only 2%. I see ROST growing profits in the mid-to-low teens the next four quarters, and at 17 times earnings the stock is fairly priced.
One Year Chart
Ross was growing well the last year, with two quarters of 25% or better profit growth. But the company is expected to grow profits only 10% on average for the next four quarters. That’s slowing profit growth — and slowing growth often leads to a stock’s decline. I would wait for ROST to dip a bit.
One positive is Annual Profits have grown every single year. This is a company with a high degree of certainty and consistency. The stock is a good one for moderate to conservative investors. Growth investors could use a little more growth than 12-14% per year.
Fair Value
ROST is expected to grow profits 12% for the next three-to-five years, and it also pays a dividend, of maybe 2% per year. Since this company is solidly built and will probably keep selling clothes in any environment, I feel the stock is worth 16 times earnings.
Ross Stores is a little overvalued now, but what a really don’t like is 2014 upside is only 8%. We can do better.
Sharek’s Take
Ross Stores is a great stock for someone looking to grow their money 12% per year. The company has certainty, consistency and growth opportunity as it grows from 1250 or so stores now to probably 2500. The issues I have with ROST now are (1) profit growth is moderating, which that often leads to a stock’s decline (in this case probably a pullback), and (2) the stock is fairly valued and has little upside through 2014.
For now we sit and wait and if ROST dips (like it should) then I will likely buy the stock in the Growth Portfolio.
View the Earnings Table here.View the Ten Year Chart here.
