Slowing Growth for Ross Stores

Ross Stores (ROST) was on a good run, having grown profits an average of 18% a qtr the prior year, as the stock rose from $33 to $55. Then the company posted 11% profit growth last qtr and the stock dropped from $55 to $50 as management warned the next qtr would be tougher, expecting +1% same store sales which would be down from the 4% gain posted last qtr.

Right now ROST expected to grow 12% long-term in addition to paying a 1% dividend, for perhaps a 13% total annual return (if the P/E stays the same and the earnings do grow 12%). It’s a safe stock, Value Line rates it 2 for safety and the Beta 0.86 which means its less volatile than the stock market. The company has a market cap of $20 billion and is in the midst of a two-year $1.4 billion buyback program, which at this rate would drop the share count by 7%. Growing the store count, increasing same store sales at a modest rate, paying a dividend and buying back stock is an excellent recipe for success.

Ten Year Chart

ROST_2015_Q3_10yrThe ten-year chart looks great, with +20% profit growth and stock growth (on average) but at the bottom/right note profit growth has slowed a bit the past few years. With over 1000 locations in 33 states, Ross might be running out of room to grow. Or at least at a rapid rate.

Also, the one-year chart (link below) shows a clearer picture of the slowing growth. The prior 4 qtrs ROST had profit growth of +18%, +18%, +19% and +11% last qtr. Estimates show +6% and +7% profit growth coming the next 2 qtrs.

Profit History

ROST_2015_Q3_PHRoss is selling for 20x earnings, which to me seems a bit high. Especially considering the stock had P/E of half that from 2009-2012. 20x earnings isn’t bad when proftis were growing 18% to 19%, but its too high when profits are growign around 10% as they are now. My Fair Value on the stock is 18x earnings, or $44 a share, which I feel is generous.

Also, the stock goes through prolonged periods where it hasn’t made any headway. The median price was $7 from 2005-2008, and when we go further back into the stock’s history it had other stagnant periods such as 1986-1995 (hung around $0.50) and 1997-2001 (stayed around $2).

Sharek’s Take

Ross Stores is a quality stock with a good degree of safety for conservative investors. Analysts predict earnings will grow 12% a year long-term and the company pays a 1% dividend, so if you get in at the right price you could earn a 13% total annual return. But I feel ROST is a little high right now, and now profit growth has slowed so the momentum may be lost in the short-term. To me, it makes sense to hold off on the stock for now, I would like to be a buyer around $40 a share.

View the One Year Chart here.
View the Earnings Table here.

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