Why TJX Companies Shares Are Up 6%

Actions of The TJX Companies (TJX 6.00%) — probably better known to shoppers as TJ Maxx — was up 5.9% by 10:45 a.m. ET after the company on Wednesday morning announced a cut to its sales and earnings estimates.

For the quarter, analysts expect TJX to earn $0.92 per share on sales of $13.3 billion. In fact, it earned $0.96 per share and its revenue approached $13.5 billion.

TJX Second Quarter Earnings

TJX reported a 6% increase in second-quarter sales year-over-year, including a 4% gain in same-store sales (comps). (The rest of the sales gains came from opening new stores). The company then turbocharged that fairly modest sales growth with a 50 basis point increase in profit margins (now at 10.9%), resulting in a total 13% increase on the bottom line.

CEO Ernie Herrman said he was “extremely pleased” with his company’s performance, noting that sales growth has been steady at 6% so far this year and comps growth is on the rise. In light of this, management has decided to raise guidance for the remainder of this year.

Is TJX Stock a Buy?

What is curious is how this guidance was raised. Management says comps will grow only 2% to 3% in the third quarter, which would be a slowdown. But profit margins are forecast to expand substantially, to 11.8% or even 11.9% — as much as a sequential increase of 100 basis points, resulting in earnings per share of about $1.07.

TJX expects full-year compensation to rise 3%, margins to average 11.2% and earnings to reach nearly $4.11 per share.

It’s all great news — except for what it means for stock valuations. Divided by a share price of $120, earnings of $4.11 imply a price-to-earnings ratio of 29. That’s actually a bit high for a company that’s growing sales by 6%, even as profits grow by two times faster in teenagers.

All things considered, I’d say this makes TJX a great business that’s growing well, but not a cheap stock. Enjoy today’s earnings, investor. But at this price, the stock isn’t a compelling buy.