Buy Discount Retailer TJX Ahead of Third-Quarter Earnings
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Off-price retailer TJX (TJX) - Get Report will report third-quarter fiscal 2016 earnings results before the opening bell Tuesday. Despite the revenue and earnings growth struggles in the retail sector that have sent the SPDR S&P Retail ETF (XRT) - Get Report down 11% in 2015, TJX has been a standout performer. And there are plenty more reasons to expect these shares to rise in the quarters ahead.
For the quarter that ended in October, analysts on average expect earnings of 85 cents a share on revenue of $7.73 billion, translating to flat earnings and a 5% increase in revenue. For the full year ending in January, earnings are projected to climb 4.7% to $3.31 a share, while revenue of $30.69 billion would mark an increase of 5.6%.
Despite beating Wall Street's earnings and revenue estimates in three straight quarters, shares of the Framingham, Mass.-based company have struggled, falling some 5% in 2015, including 10% declines just in the past month.
However, TJX is being punished for the struggles of the sector, not for its own doing. Now, with its shares trading at around $64 -- 19 times earnings compared to an average price-to-earnings ratio of 21 for stocks in the S&P 500 (SPX) index -- investors would do well to bet on an upside surprise following its earnings report.
The company is enjoying higher gross profit margins even as the strong U.S. dollar pressures its overseas sales. And TJX is actively buying back its own stock. After taking almost 7 million shares off the market in its fiscal third quarter, the company still plans to buy roughly $2 billion worth of shares in the next two quarters alone. That's more money that will be placed in investors' pockets.
TJX's consensus fiscal 2017 earnings-per-share estimates are $3.72, 12% above its current full-year forecast. You would be correct to point out that EPS of $3.72 puts its forward P/E at 19 -- two points higher than that of the average stock in the S&P 500 index. At the same time, the forecast jump in fiscal 2017 earnings per share would mark a growth rate of three times that of 2016 estimates.
At that rate, TJX's earnings are projected to grow at twice the rate of annual revenue, underscoring the focus management has placed on returning value to shareholders. And if you're worried about slowing growth, the company is projected to grow earnings at an average annual rate of 11% in the next five years -- twice the projected earnings growth rate of the S&P 500 index.
In that vein, it makes sense to get ahead of that growth and own TJX shares. Not only does the stock have a consensus buy rating, its average analyst 12-month price target is $82.50. That's an excellent value, especially considering its 21-cent quarterly dividend, which yields 1.20% annually.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.