August 3, 2016

Valens Equities Weekly Insights and Inflections for August 3, 2016


Each week the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights

Expectations for ROST to see ROA’ expand to historical highs is unwarranted, as management has concerns about growth and profitability

ROST - 2016 08 03

ROST is trading at a 22.4x V/E’, which is near the high end of historical valuations. At these levels, the market is pricing in expectations for an improving ROA’, from 16.4% in 2016 to 19.3% in 2021, with no Asset’ growth going forward. Analysts have expectations in line with the market, expecting ROA’ to slightly improve by 2018, accompanied by 3% Asset’ growth. However, Valens’ qualitative analysis highlights management’s concerns about various aspects of their business. Furthermore, management compensation analysis highlights that the management team will likely be solely focused on growing earnings, without regard for asset utilization or improving returns. Concerns about the firm’s fundamentals, as well as headwinds related to their compensation structure, imply that market expectations for historically high performance are unwarranted and that equity downside may be justified.

Market Insights
Most Compelling Long Ideas
FB, ZG, DLTR, DHI, GOOGL
Most Compelling ECF™ Inflections
ABC, AYI, WCN, SCI, AMZN

Company Specific Highlights & Insights:
AKAM, AMAT, ATVI, DHI, EIX, ETE, EW, FIS, MON, NKE, ORLY, PAA, QCOM, RH, DB:SIE, SMLP, STZ, SXL, LSE:VOD

Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. In April, Management Confidence spiked higher, but the metric subsequently rolled over in May, falling to the low end of its range. This signaling that growth remains elusive, as management teams continue to not be confident enough to invest in their businesses.

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