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

Morningstar.com

Yahoo! Finance

Ross Stores Inc

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

Ross Stores Inc: $ROST cash flow valuation

Current Price: ~ $81/share
Projected Yield: ~ 1.10%

Ross Stores is the nation's second-largest off-price retailer of brand-name apparel and home accessories. The company operates about 990 Ross Dress for Less stores and roughly 70 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.

I estimated the firm's WACC today at 10.58% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	157
2003	199
2004	169
2005	149
2006	199
2007	283
2008	117
2009	359
2010	730
2011	474
TTM	292

Average Annual Growth FCF: ~ 32%

CAGR FCF: ~ 13%

Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Scenario 1

Starting at $474 million FCF, assuming the company achieves a 5-year growth rate in FCF of 12% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	474
1	531
2	595
3	666
4	746
5	835
Terminal Value	8839

The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $7807 million. If the firm's fair value of debt is estimated at $173 million, then the fair value of the firm's equity could be $7634 million.  $7634 million / 117 million outstanding shares is approximately $65 per share and a 20% margin of safety is $52/share.

Scenario 2

Starting at $474 million FCF, assuming the company achieves a 5-year growth rate in FCF of 12% per year, and then a growth rate in FCF of 2.75% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	474
1	531
2	595
3	666
4	746
5	835
Terminal Value	11941

The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $9683 million. If the firm's fair value of debt is estimated at $173 million, then the fair value of the firm's equity could be $9510 million.  $9510 million / 117 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.

Sources

Morningstar.com

Yahoo! Finance

Rossstores.com

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