The Best Companies of the Retail Industry – August 2015

While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the retail industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 550 companies reviewed by ModernGraham, 27 were identified as being closely related to the retail industry. Of those, only three are suitable for the Defensive Investor, twelve are suitable for the Enterprising Investor, and the remaining twelve are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 107.33% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 22.33. The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Ann Inc. (ANN)

Ann Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings growth or stability over the last ten years, the lack of dividends, and the high PEmg and PB ratios. The Enterprising Investor is only initially concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.14 in 2012 to an estimated $1.81 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.33% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Bed Bath & Beyond Inc. (BBBY)

Bed Bath & Beyond Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, lack of dividends, and the high PB ratio. The Enterprising Investor is only initially concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.99 in 2012 to an estimated $4.91 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.1% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Dollar Tree Inc. (DLTR)

Dollar Tree Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the lack of dividends, along with the high PEmg and PB ratios. The Enterprising Investor is only initially concerned by the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.48 in 2012 to an estimated $2.84 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 9.2% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Fossil Group Inc. (FOSL)

Fossil Group performs well in the ModernGraham model and is suitable for both Defensive and Enterprising Investors. Both investor types are only initially concerned by the lack of dividend payments. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.68 in 2011 to an estimated $6.01 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 1.68% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 16% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time. (See the full valuation)

Ross Stores Inc. (ROST)

Ross Stores Inc. is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the low current ratio, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the low current ratio. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.66 in 2011 to $3.75 for 2015. This level of demonstrated growth outpaces the market’s implied estimate of 8.69% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price. (See the full valuation)

TJX Companies (TJX)

TJX Companies is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the low current ratio along with the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.56 in 2012 to an estimated $2.98 for 2016. This is a robust level of demonstrated growth and outpaces the market’s implied estimate for annual earnings growth of 7.3% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 18.3% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that TJX Companies is significantly undervalued at the present time. (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Coach Inc. (COH)

Coach Inc. qualifies for the Enterprising Investor and the more conservative Defensive Investor. The Defensive Investor is only concerned with the short dividend history. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.38 in 2011 to an estimated $2.67 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 1.58% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

Kohl’s Corporation (KSS)

Kohl’s Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, the short dividend history, and the insufficient earnings growth over the last ten years. The Enterprising Investor is only initially concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.65 in 2012 to an estimated $4.17 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 2.45% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

L Brands Inc. (LB)

L Brands Inc. is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the low current ratio, high PEmg and PB ratios, while the Enterprising Investor is concerned with the level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.67 in 2011 to $3.01 for 2015. This level of demonstrated growth supports the market’s implied estimate of 10.28% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling within a margin of safety relative to the price. (See the full valuation)

Nordstrom Inc. (JWN)

Nordstrom Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio, and the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.62 in 2012 to an estimated $3.62 for 2016. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 6.3% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 7.7%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Nordstrom Inc. is fairly valued at the present time. (See the full valuation)

Tractor Supply Company (TSCO)

Tractor Supply Company qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, short dividend history, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.08 in 2011 to an estimated $2.53 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 14.06% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

Urban Outfitters (URBN)

Urban Outfitters passes the initial requirements of the Enterprising Investor but not the Defensive Investor. Specifically, the Defensive Investor is concerned by the lack of dividends, and the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the lack of dividends. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.30 in 2012 to an estimated $1.71 for 2015. This level of demonstrated growth does not support the market’s implied estimate for annual earnings growth of 5.92% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 6.42% annually, but the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, and returns an estimate of intrinsic value well below the current price, indicating that Urban Outfitters is overvalued at the present time. (See the full valuation)

The Full List

To view the MG Value and PEmg information, you must be logged in as a premium member. Clicking on the company name will take you to the company’s latest valuation.

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker	Name with Link	Investor Type	Latest Valuation Date	MG Value	Recent Price	Price as a percent of Value	PEmg Ratio	Div. Yield
BBBY	Bed Bath & Beyond Inc.	E	8/21/2015	—	$61.87	—	—	N/A
ANN	Ann Inc	E	8/18/2015	—	$44.92	—	—	N/A
KSS	Kohl’s Corporation	E	8/18/2015	—	$52.30	—	—	3.44%
AAN	Aaron’s, Inc.	D	7/31/2015	—	$37.82	—	—	0.24%
JWN	Nordstrom, Inc.	E	7/29/2015	—	$75.19	—	—	1.97%
TSCO	Tractor Supply Company	E	7/27/2015	—	$85.59	—	—	0.93%
COH	Coach Inc	D	7/23/2015	—	$30.71	—	—	4.40%
DLTR	Dollar Tree, Inc.	E	7/22/2015	—	$76.35	—	—	N/A
TJX	TJX Companies Inc	E	7/21/2015	—	$71.56	—	—	1.17%
TIF	Tiffany & Co.	E	7/17/2015	—	$85.89	—	—	1.86%
URBN	Urban Outfitters, Inc.	E	6/30/2015	—	$30.15	—	—	N/A
TGT	Target Corporation	S	6/19/2015	—	$78.44	—	—	2.86%
FOSL	Fossil Group Inc	D	6/17/2015	—	$60.44	—	—	N/A
BBY	Best Buy Co Inc	S	5/27/2015	—	$30.18	—	—	3.05%
LB	L Brands Inc	E	5/25/2015	—	$80.29	—	—	2.49%
GME	GameStop Corp.	S	5/23/2015	—	$44.89	—	—	3.21%
ROST	Ross Stores, Inc.	E	5/23/2015	—	$50.00	—	—	0.94%
MCK	McKesson Corporation	S	5/10/2015	—	$202.64	—	—	0.55%
WBA	Walgreens Boots Alliance Inc	S	5/10/2015	—	$85.61	—	—	1.68%
DG	Dollar General Corp.	S	4/1/2015	—	$77.02	—	—	1.14%
M	Macy’s, Inc.	S	2/10/2015	—	$59.21	—	—	2.43%
COST	Costco Wholesale Corporation	S	1/25/2015	—	$138.99	—	—	1.15%
AMZN	Amazon.com, Inc.	S	1/24/2015	—	$494.47	—	—	N/A
FDO	Family Dollar Stores, Inc.	E	1/24/2015	—	$79.42	—	—	1.56%
CVS	CVS Health Corp	S	11/27/2014	—	$102.30	—	—	1.37%
WMT	Wal-Mart Stores, Inc.	S	11/19/2014	—	$66.56	—	—	2.94%
SPLS	Staples, Inc.	S	9/18/2014	—	$13.79	—	—	3.48%

Disclaimer: The author held a long position in Coach Inc. (COH) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logos taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.