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The TJX Companies, Inc. (TJX) vs. Tractor Supply Company (TSCO): Which is the Better Investment?

The TJX Companies, Inc. (NYSE:TJX) shares are up more than 42.53% this year and recently decreased -1.19% or -$1.31 to settle at $108.98. Tractor Supply Company (NASDAQ:TSCO), on the other hand, is up 18.54% year to date as of 09/13/2018. It currently trades at $88.61 and has returned -1.45% during the past week.

The TJX Companies, Inc. (NYSE:TJX) and Tractor Supply Company (NASDAQ:TSCO) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect TJX to grow earnings at a 10.68% annual rate over the next 5 years. Comparatively, TSCO is expected to grow at a 13.70% annual rate. All else equal, TSCO’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 11.51% for Tractor Supply Company (TSCO). TJX’s ROI is 33.00% while TSCO has a ROI of 23.50%. The interpretation is that TJX’s business generates a higher return on investment than TSCO’s.

Cash Flow



Cash is king when it comes to investing. TJX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.45. Comparatively, TSCO’s free cash flow per share was +1.52. On a percent-of-sales basis, TJX’s free cash flow was 0.78% while TSCO converted 2.55% of its revenues into cash flow. This means that, for a given level of sales, TSCO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. TJX has a current ratio of 1.60 compared to 1.90 for TSCO. This means that TSCO can more easily cover its most immediate liabilities over the next twelve months. TJX’s debt-to-equity ratio is 0.43 versus a D/E of 0.41 for TSCO. TJX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TJX trades at a forward P/E of 20.14, a P/B of 13.00, and a P/S of 1.80, compared to a forward P/E of 19.30, a P/B of 7.69, and a P/S of 1.43 for TSCO. TJX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. TJX is currently priced at a -3.74% to its one-year price target of 113.22. Comparatively, TSCO is 5.6% relative to its price target of 83.91. This suggests that TJX is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TJX has a beta of 0.70 and TSCO’s beta is 1.38. TJX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. TJX has a short ratio of 2.21 compared to a short interest of 3.79 for TSCO. This implies that the market is currently less bearish on the outlook for TJX.

Summary

Tractor Supply Company (NASDAQ:TSCO) beats The TJX Companies, Inc. (NYSE:TJX) on a total of 8 of the 14 factors compared between the two stocks. TSCO is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, TSCO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, UNH has better sentiment signals based on short interest.

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