A short background to the investment is that I have owned HM since the market crash 2008 but due to the recent very high valuation of HM I have sold out part of the investment to buy some other companies. However, I like the simplicity and stability of HM and have therefore for some years been following another company that I think is somewhat similar to HM and that maybe could do the same trip as HM without necessarily competing too much with HM.
Some 'soft' investment highlights that I like about ROST (you can read up briefly on the company for instance here or on their homepage):
- The company has proven itself over quite many years (about since mid 80's when it was IPOd), with a concept that now encompass over 1300 stores (Ross Dress for Less and dd's Discount) over large, but not all, parts of US. They seems to have a very well-defined concept that has been consistently expanding for more than 20 years
- What I personally like very much from an outside perspective (without knowing the persons) is that the recent succession is an internal manager. New CEO Barbara Renter has been with the company for 28 years and her most recent position has been Chief Merchandising Officer. Also some other promotions are for internal managers, and notably former CEO Michael Balmuth has become Chairman of the Board. I like consistency in management, and internal promotions of management. For me that is one of the strongest signs in a 'simple business-idea' company that the concept works, that the management believe in it and that they will not change the winning concept. Kids, you can read about this in the book 'Built to last' by Jim Collins and Jerry I. Porras.
- One weak point is that there is (to my understanding) not one single strong 'flesh-and-blood' owner. However, this is partly compensated with the fact that several key managers own about 10-30 MUSD of stock in the company, which I think is a large enough sum to really care about what you are doing as a manager. Please however also note that most managers seem to sell of a smaller sum consistently over time
- 20 years of consecutive dividend increase (although at only about 1,3% yield yesterday, dividend ratio (to EPS) has been below 20% historically)
- Number of outstanding shares is decreasing continuously. The management has driven a share buy-back strategy consistently over a long time period as a way to distribute the free cash flow back to shareholders.
- My outside view of the key issue and opportunity for this company is that it will have to prove that its concept will work outside the US within about five years (as growth opportunities in the US is starting to diminish). As their largest peer (TJX) has done this (although with some problems if I understand) in both Canada and parts of Europe, I believe ROST can also do it.
'Hard-facts' investment highlights:
I have looked back at key figures of EPS, equity per share, RoE, dividend per share, share of earnings as dividend, year-end share price, P/E ratio, number of shares and interest-bearing debt. In the table below you can see the key figures, for most of the metrics since 1997. I have calculated the seven and 14 year CAGR averages in growth for EPS, equity per share and dividend using three-year averages (i.e. comparing the period 2011-2013 with 2004-2006). RoE, dividend share of earning and P/E averages are normal averages, whereas share price is normal CAGR for the latest seven and 14 years respectively. In the row above ('Assumptions going forward') you can see my key assumptions on RoE (38% this year and declining to 30% in 2020), dividend share of earnings (at 20% this year and increasing up to 75% in 2023) and 'normalized' P/E ratio of 15 (as compared to 15,3 for the last seven years and 17,0 for the last 14 years). The share price of 62,23 USD correspond to the price of my latest purchase.
Interest-bearing debt is low at 150 MUSD and cash was 435 MUSD at year-end, giving a negative net interest-bearing debt, which is something I really prefer in my investments.
I will go into more details about my thinking on how this 'hard-facts analysis' works in a separate post. However, with the above assumptions (which I deem fairly realistic on the side of conservative), I expect a investment CAGR (share price increase before tax and received dividends after-tax) of
a) 13,8% in a 3-year perspective
b) 11,9% in a 10-year perspective
c) 10,4% in a 20-year perspective
This is above my target return of 10% p.a.
The CAGR figures are calculated using the expected share price and dividend that you can see for the upcoming years, given that the assumptions about RoE, dividend share and P/E ratio hold.
One strange thing about this company is the following note in the latest 10-K on p11:
"There were 822 stockholders of record as of March 12, 2014 and the closing stock price on that date was $72.38 per share.".
A company of this size only having about 800 stockholders, can that really be true? Is there any reader with good knowledge about US stocks out there that could clarify this to me; could this really be the case for such a large company as ROST (a little bit less than 1/4 of HM as measured by market cap)?
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