UBS highlights Ross Stores’ stock potential but sees P/E ceiling in near term

On Friday, UBS updated its outlook on Ross Stores, Inc. (NASDAQ:ROST) stock, increasing the price target from $147.00 to $167.00, while keeping a Neutral rating.

The decision follows Ross Stores' second-quarter report, which indicated that the company's fundamental business remains strong despite economic pressures faced by its core demographic of low-to-middle income consumers.

Ross Stores' performance has been robust, and UBS anticipates that the retailer will continue to outperform its department store competitors in the coming years.

The analysis by UBS suggests that Ross Stores is on track to achieve an 8.5% compound annual growth rate (CAGR) in earnings per share (EPS) over a five-year period. This growth projection is seen as justifying a price-to-earnings (P/E) ratio of approximately 23 times.

The market's current valuation of Ross Stores reflects a P/E ratio around 25 times for the fiscal year, which UBS considers to be in line with their assessment. Despite the positive growth outlook, UBS does not foresee a significant catalyst that would drive the P/E ratio much higher than its current level.

Furthermore, data from the UBS Quant Team indicates that Ross Stores is a highly popular investment, described as a "very crowded long." Conversations with investors, according to UBS, suggest that there is limited potential for a more bullish positioning in the market for Ross Stores shares at this time. The updated price target reflects UBS's expectations for the company's financial performance and market position moving forward.

In other recent news, Ross Stores, Inc. has been the subject of positive attention from several financial firms following robust financial growth. The company's second-quarter earnings per share surged to $1.59, surpassing analyst estimates, and revenue increased by 7% year-over-year, reaching $5.3 billion. Comparable store sales also saw a 4% uptick compared to the same period last year.

Baird, Goldman Sachs, Deutsche Bank, Wells Fargo, and BofA Securities have all raised their price targets for Ross Stores, pointing to the company's operational excellence and ability to surpass market expectations.

This comes after Ross Stores reported strong comparable store sales and earnings per share, exceeding consensus expectations, and an upward revision of its full-year earnings per share forecast to $6.00-$6.13.

Analysts noted Ross Stores' strategy to focus on deeper value propositions is resonating with customers, which aligns with positive market checks. The company's shift towards offering a greater mix of branded merchandise has been noted as a significant driver of growth, despite projected pressures on merchandise margins.

These recent developments reflect the company's strong value proposition and its success in capturing market share in a challenging consumer environment.

InvestingPro Insights

The recent price target update by UBS for Ross Stores, Inc. (NASDAQ:ROST) draws attention to the retailer's resilience and potential for steady growth. Complementing this analysis, InvestingPro data portrays a company with a solid financial footing and a promising investment profile. Ross Stores boasts a market capitalization of $50.88 billion, underlining its significance in the retail sector. Its P/E ratio, at 25.63, aligns closely with UBS's evaluation and suggests that the stock is trading at a reasonable valuation given its near-term earnings growth.

InvestingPro Tips highlight that Ross Stores has not only maintained dividend payments for an impressive 31 consecutive years but also raised its dividend for the last three years, signaling a commitment to shareholder returns. Additionally, the stock's low price volatility and status as a prominent player in the Specialty Retail industry add to its attractiveness. With a PEG ratio of 0.81 for the last twelve months as of Q1 2023, the company's growth rate is considered to be at a discount relative to its earnings growth, potentially offering an appealing entry point for growth-focused investors.

For those interested in further insights, InvestingPro offers additional tips on Ross Stores, providing a more comprehensive picture of the company's financial health and market performance. Currently, there are 13 more InvestingPro Tips available, which can guide investors in making informed decisions.

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