In this week’s content analysis we’ll be covering the process behind one of the transactions in this week’s rebalancing of the US Large-Cap model portfolio. Following Petsmart (PETM) being delisted in March as a result of its acquisition, we needed to replace the position with another holding in the consumer discretionary sector, as dictated by our Market Trend tool. The choice was TJX Companies (TJX), ranked second in the sector with a SPScore of 71% (for all companies with market cap greater than $10B). 
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TJX’s economic performance is exceptional, particularly when compared to its peers in the apparel retail space. Despite very minor decreases in return on capital (23.4% in 2013 to 22.3% last year), the number remains very high—both in isolation, and when compared to the company’s cost of capital at 7.8%. TJX’s EVA has been positive and stable since July 2013, supported by its NOPAT (net operating profit after tax) growing at the same pace as total invested capital.
From a value perspective, TJX is trading at a P/IV ratio of 1.03 (as of June 2nd, 2015). The dip in intrinsic value last quarter was the result of an increase in long-term debt and a small dip in its invested capital growth rate relative to the year prior. Future growth value (FGV) is at 33.8%, illustrating that the market is pricing the stock at a substantial premium in anticipation of future growth.
To close with accounting performance we’ll highlight that TJX has been able to grow both its dividends and its EPS in each of the past five years. Over this time the company has also consistently generated high levels of Free Cash Flow and continued a stable share buyback schedule. Total common shares outstanding has decreased by 14% over these five years.
Within the same sector (consumer discretionary), DirecTV (DTV) was TJX’s ‘competition’ for selection in our US Large-Cap portfolio. Similar by their SPScores, DTV’s return on capital has been dropping at a faster pace (24.2% to 19.6% in two years). DTV’s debt ratio, at 98%, was also a factor we considered, when compared to TJX’s debt ratio at 21%. Return on capital and debt ratio were, in this instance, the two metrics tipping our decision towards TJX Companies Inc.
