DCF Studio

    ROST · NMS · Consumer Cyclical

    Ross Stores, Inc.

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 102.35

    Market price

    USD 226.61

    Implied upside

    -54.8%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 3.6% of revenue against depreciation of 2.1%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Current EV/EBITDA of 22.8x sits outside a defensible 3-20x band, so the exit multiple is capped at 20.0x. A multiple that far out usually means EBITDA is the wrong denominator for this business.

    Value Per Share

    Perpetuity growth
    USD 102.35-54.8%
    Exit multiple
    USD 201.41-11.1%
    Market price
    USD 226.61

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn1bn3bnFY27FY28FY29FY30FY31
    Nominal FCFFDiscounted to todayUSD
    LineFY27FY28FY29FY30FY31CAGR
    RevenueUSD 24.3bnUSD 25.9bnUSD 27.7bnUSD 29.6bnUSD 31.6bn+6.8%
    EBITUSD 2.8bnUSD 3.0bnUSD 3.2bnUSD 3.4bnUSD 3.6bn+6.8%
    NOPATUSD 2.2bnUSD 2.4bnUSD 2.5bnUSD 2.7bnUSD 2.9bn+6.8%
    Add depreciation & amortisationUSD 517.5mUSD 552.5mUSD 589.9mUSD 629.8mUSD 672.4m+6.8%
    Less capital expenditureUSD -865.4mUSD -923.9mUSD -986.3mUSD -1.1bnUSD -1.1bn+6.8%
    Less increase in working capitalUSD 87.7mUSD 93.7mUSD 100.0mUSD 106.8mUSD 114.0m-6.8%
    Free cashflow to firmUSD 2.0bnUSD 2.1bnUSD 2.2bnUSD 2.4bnUSD 2.5bn+6.8%
    Discount factor0.95530.87180.79550.72600.6625-
    Present valueUSD 1.9bnUSD 1.8bnUSD 1.8bnUSD 1.7bnUSD 1.7bn-2.6%
    Present Value Of The ForecastUSD 8.9bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta0.907Reported 0.861, pulled toward 1.0 (Blume)
    Cost of equity9.99%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 72.7bn93.3% of capital
    Total debtUSD 5.2bn6.7% of capital, book value as a proxy
    Tax rate21.0%Effective, capped at statutory
    WACC9.58%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 102.35

    74% of EV

    Forecast FCFF, final year
    USD 2.5bn
    Capex at depreciation, working capital in reinvestment
    USD 2.9bn
    Less reinvestment at g/ROIC (9.7% of NOPAT)
    USD -281.1m
    Capitalised
    USD 2.6bn
    ROIC (reported)
    25.7%
    Terminal value, undiscounted
    USD 37.7bn
    Terminal value, discounted
    USD 25.0bn
    Enterprise value
    USD 33.8bn
    Less net debt
    USD 617.9m
    Equity value
    USD 33.2bn

    Exit at 20.0x EBITDA

    Value per shareUSD 201.41

    87% of EV

    Terminal value, undiscounted
    USD 86.2bn
    Terminal value, discounted
    USD 57.1bn
    Enterprise value
    USD 66.0bn
    Less net debt
    USD 617.9m
    Equity value
    USD 65.3bn

    Spread between methods: 65%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    7.58%127.23134.50143.18153.72166.81
    8.58%108.86113.74119.40126.05133.99
    9.58%95.0598.47102.35106.80111.97
    10.58%84.3086.7789.5392.6496.17
    11.58%75.7077.5279.5481.7884.28

    Outlined: this model. Green text: above today's price of 226.61. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year6.8%26.2%+19.5pp
    EBIT margin11.5%24.8%+13.3pp
    Discount rate9.6%5.7%-3.9pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.