The Container Store: ready to capture market share (NYSE: TCS)

Svetlana Evgrafova/iStock via Getty Images

The container store

The Container Store (TCS) is a specialty retailer that offers custom storage, organization and closet products. TCS is an American retail chain and has frequented Fortune’s “100 Best Companies to Work For” list. The company has a market cap of less than $500 million, but has product offerings that compete with some of the biggest US retailers. For many companies, competing with market leaders would not be ideal; however, TCS offers a more personalized selection and is financially positioned to begin capitalizing on its total addressable market.

TCS Revenue
Data by YCharts

Before analysis

“Analysis of this investment idea is going to be split between comparable company analysis and alternative EPS valuation models.” I believe the bread and butter of small and mid cap analysis comes from more unique valuation strategies. Indeed, traditional valuation models are far too based on assumptions to predict obscure financial statements. Similarly, an analysis of comparable companies can only be considered reliable if the companies are almost carbon copies, which is rarely the case for small companies.

Comparable companies

TCS vs peers in percentage price change
Data by YCharts

Peer-to-peer analysis is much more difficult with smaller companies because their product offerings are much more unique and have not yet been adopted by the market. However, we can compare TCS to the market leaders in the field, as it is their market that TCS seeks to capitalize on.

For this analysis, I chose: Bed Bath & Beyond (BBBY), Target (TGT), The Home Depot (HD) and Lowe’s (LOW). Normally I would include a brief summary for each, but these companies are all well-known, which makes me optimistic when comparing them to TCS.

Value and profitability of TCS

Wallmine Data

In terms of value, TCS is leading the pack and it should consider trying to break into this massive total addressable market; if the company was already trading at a premium, I would be pessimistic about its ability to challenge these giants. Profitability tells the same story, higher margins than the competition, which is necessary to facilitate much-needed growth. However, the return ratios could be stronger (I included ROE for visualization, but in terms of analysis ROE should be discarded).

Normally I would spend more time on a D/E above 2 but when you compare it again to market leaders, that’s not a concern. Overall, the company is lower priced and more profitable than its peers. Coupled with its superior capital structure, TCS is poised to compete with market leaders.

EPS Multiplier Model

EPS multiplier pattern (link to a detailed explanation on this pattern)

The steps are as follows: Calculate the weighted average cost of capital or WACC.

TCS WACC

Data from Yahoo Finance

Pull current year EPS and last 5 years growth rate. Move current year EPS using growth rate. Multiply the year 5 EPS and the hypothetical P/E to get the year 5 price estimate. Rebate to WACC.

TCS-EPS

Data from Yahoo Finance

Looking at the model, we see that the fair value of TCS is $9.79, which puts the company at an 11% discount.

Investment projection

TCS price table
Data by YCharts

Although this figure is significantly lower than the company’s recent peak, it is because we used the growth rate of the last 5 years to evaluate the TCS. Using 3.22% is a worst case scenario model, as Yahoo Finance gives 15.30% growth over the next 5 years. When benchmarking TCS against its competitors, it is clear that TCS is in a better financial position, which will allow the company to reach this absurd growth rate of 15.30% and start to take market share from the big players. If the best-case scenario is massive growth and the worst-case scenario is an 11% discount, it’s safe to say that TCS is a solid investment.

About Catriona

Check Also

Jingrui struggles to explain the disappearance of bank deposits

PwC was told the bank had no record of receiving the confirmation letters (Source: Getty …