Following a 45% rise since the March 23 lows of this year, at the current price of around $53 per share we believe TJX Companies stock (NYSE: TJX) has reached its near term potential. TJX’s stock has rallied from $37 to $53 off the recent bottom compared to the S&P which moved 47% over the same time period. Gradual store re-openings, as well as a rebound in demand for discretionary products, has helped the stock perform in line with the overall market. However, the stock is up 44% from levels seen in early 2018, over two years ago. While the company’s stock is below the figure it was at in February before the drop due to the coronavirus outbreak becoming a pandemic, the stock seems to be fairly valued as of now. Our dashboard, ‘Why TJX Stock Moved 44%?‘ provides the key numbers behind our thinking, and we explain more below.
Some of the stock price rise of the last 2 years is justified by the roughly 16% growth seen in TJX’s revenues from $35.9 billion in 2017 to $41.7 billion in 2019. This combined with a 7.9% improvement in net income margin from 7.3% in 2017 to 7.8% in 2019, and a reduction in share count due to stock repurchases worth $5.2 billion, helped earnings per share basis surge by 32.2%.
Finally, TJX’s P/E multiple grew from around 18x in 2017 to around 23x in 2019. While the company’s P/E has declined to around 20x now, it seems to be appropriately priced when the current P/E is compared to levels seen in the past years-P/E of 18x in 2017 and 23x in 2019. We believe the stock is currently appropriately valued and is unlikely to witness an upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak.
How Is Coronavirus Impacting TJX’s Stock?
The Coronavirus crisis has hit the consumer discretionary industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the retail industry. The effects of Covid-19 were clearly evident in the company’s Q2 2020 (ending July) earnings, with the company’s revenues plunging by 32% y-o-y to $6.7 billion. However, the company is one of the largest retailers with the company operating more than 4,500 stores across the globe. The company’s stores have re-opened which should provide a boost to the company’s revenues as traffic returns to normal. Moreover, the company offers a wide variety of brand apparel, footwear, accessories, beauty, and home products which should also provide a boost to the company’s revenues. Nevertheless, TJX’s revenue (demand) is likely to be lower in FY’20- indicating the company’s stock is fairly valued and offers little upside.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.