Wednesday, July 18, 2012

Ross Stores Inc: $ROST Cash Flow Valuation Update

Current Price: ~ $69/share
Projected Yield: ~ .72%


Ross Stores is one of the largest off-price retailers of brand-name apparel and home accessories. The company operates about 1,051 Ross Dress for Less stores and 95 dd's Discounts stores in the United States. Ross Dress for Less offers merchandise at prices that are 20%-60% below the regular prices of most department and specialty stores; dd's Discounts is a similar concept with lower-tier brands and prices that are 20% lower than those at Ross Dress for Less.

Estimated WACC for the firm today is 6.87% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2003
199
2004
169
2005
149
2006
199
2007
283
2008
117
2009
359
2010
730
2011
474
2012
404







Average Annual Growth FCF: ~ 28%
CAGR FCF: ~ 8%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 13% per year
Internal Growth Rate: ~ 21%
Sustainable Growth Rate: ~ 65%

Scenario 1
Average FCF (2012, 2011, 2010) is $536 million
  • Start at $536 million FCF
  • Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation


Year
FCF $Millions
0
536
1
606
2
684
3
773
4
874
5
988
Terminal Value
16254




The firm's future cash flows, discounted at a WACC of 6.87%, give a present value for the entire firm (Debt + Equity) of $14841 million. If the firm's fair value of debt is estimated at $186 million, then the fair value of the firm's equity could be $14655 million.  $14655 million / 226 million outstanding shares is approximately $65 per share and a 20% margin of safety is $52/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 8% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation


Year
FCF $Millions
0
536
1
579
2
625
3
675
4
729
5
788
Terminal Value
22004



  • Present Value of the entire firm (Debt + Equity): $18554 million
  • Value of Equity: $18368 million or $81/share
  • 20% margin of safety is $65/share


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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