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Target Corp

10/30/2014

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Target's recent problems have been pretty well documented and publicized by Target Corporation as well as just about every financial writer on the internet. But as those problems begin to recede into the past, it's time to take a second look at the company and see if there's a light at the end of the tunnel.

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The Company
Target Corporation (TGT) operates general merchandise stores in the United States and Canada. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; music, movies, books, computer software, sporting goods, and toys, as well as electronics that consist of video game hardware and software; apparel and accessories, such as apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides food and pet supplies, including dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and home furnishings and décor, such as furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive, and seasonal merchandise comprising patio furniture and holiday décor. In addition, it offers in-store amenities. The company distributes its merchandise through a network of distribution centers, as well as third parties and direct shipping from vendors. Further, it provides general merchandise through its Website, Target.com; and branded proprietary Target Debit Card and Target Credit Card. As of September 15, 2014, the company operated 1,925 stores, including 1,795 stores in the United States and 130 stores in Canada. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. (Daily Chart) (Weekly Chart)
23 October
Price $60.65
1yr Target $59.32
Analysts 22
1yr Cap Gain -2.20%
Dividend $2.08
Yield 3.42%
1yr EST Tot Return 
     1.22%

Market Cap $38.44 Bil
Beta 0.55
EPS (ttm) $2.37
Payout Ratio 87.76%
EPS next yr $3.82
P/E 25.59
PEG 2.14
Forward P/E 15.90
Debt/Equity 0.86
ROA 3.40%
ROE 9.30%
ROI 8.80%
Sales $73.23 Bil
Income $1.51 Bil
Profit Margin 2.06%

The Fundamentals
There's a lot of information that can be gathered from the company's fundamentals listed below. My first impression is that despite the security breach that occurred last year, the poor entrance into the Canadian market, and the resulting news reporting that customers were staying away in droves, sales were down only slightly (-0.97%). This is actually remarkable. It demonstrates that Target's customers are a lot more loyal and resilient than previously reported. 

But looking at the earnings it's also obvious that the company's problems were very serious. A lot of the company's financial resources have been used this past year to solve those problems. The company's earnings took a minor hit in 2009 as the entire country experienced a relatively severe recession, and earnings took a major hit in 2014 as the company itself experienced its own unique problems. Fortunately earnings are estimated to increase going forward, but it'll be beyond 2016 before earning return to the level realized in 2013. 

Target's management, in order to protect their shareholders wealth, has graciously allowed the dividend to continue to increase by letting the payout ratio increase to levels above 50%. This has reduced the company's retained earnings and may have hampered their ability to increase future profits, but I think Target understands this and will slowly reduce the payout ratio as earnings once again expand. 
 
Year (January)
2016 Est
2015 Est
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004


Revenues
$76.00 Bil
$74.06 Bil
$72.59 Bil
$73.30 Bil
$69.86 Bil
$67.39 Bil
$65.35 Bil
$64.94 Bil
$63.36 Bil
$59.49 Bil
$52.62 Bil
$46.83 Bil
$48.16 Bil

Earnings
$3.82
$3.19
$3.07
$4.52
$4.28
$4.00
$3.30
$2.86
$3.33
$3.21
$2.71
$3.51
$2.01

Dividends
$2.29
$1.99
$1.65
$1.38
$1.15
$0.92
$0.67
$0.62
$0.54
$0.46
$0.38
$0.31
$0.27

Payout Ratio
59.94%
62.38%
53.74%
30.53%
26.86%
23.00%
20.30%
21.67%
16.21%
14.33%
14.02%
8.83%
13.43%

Revenue Growth Rate
1 year = -0.97%
2 year = 1.93%
3 year = 2.48%
4 year = 2.66%
5 year = 2.25%
10 year = 4.18%
Earnings Growth Rate
1 year = -32.08%
2 year = -15.31%
3 year = -8.37%
4 year = -1.79%
5 year = 1.42%
10 year = 4.32%
Dividend Growth Rate
1 year = 19.56%
2 year = 19.78%
3 year = 21.26%
4 year = 25.27%
5 year = 21.62%
10 year = 19.84%

The Technicals
Normally I use fundamental analysis to identify great companies and technical analysis to identify the best times to buy and sell stocks, but Target is a special case because of its recent history of problems. The real information to be gathered from the charts comes from the weekly chart rather than the daily chart. It's apparent from the weekly chart that Target has been looking for, and making, a long curving bottom. In fact there might have been a double bottom in February/March and May/June (see chart below). From those points the stock has been moving higher by making higher highs and higher lows. It appears that the worse may finally be over for Target. At least technically.

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Daily Chart
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Weekly Chart

The Competition
Target Corporation is part of the Discount, Variety Stores Industry which is part of the Services Sector of the economy. Below are a few of the major corporations included in this industry. They each pay at least a minimal dividend and they are listed in the order of their market capitalization.
  1. Walmart Stores Inc.  (WMT)
  2. Costco Wholesale Corporation  (COST)
  3. Target Corporation  (TGT)
  4. Family Dollar Stores Inc.  (FDO)
  5. PriceSmart Inc.  (PSMT)
  6. Big Lots Inc.  (BIG)
  7. Freds, Inc.  (FRED)

Conclusion
I don't normally disagree with the experts on estimating a future target price on stocks, but in the case of Target I think the analysts may be a little too pessimistic. I think the target needs to be adjusted higher. If I'm wrong, the worse that could happen to an investment I would make in this company is that I'm invested too early and the investment will take longer to pay off. 

I really think this stock bottomed earlier this year near 54/55 and that the stock is slowly but consistently moving higher. I could easily see this stock priced at $68/share within a year giving this company a P/E ratio of around 17, which is not unreasonable. This would also produce a one year capital gain in excess of 12%. Add in a dividend yield of 3.42% and this results in a return on investment of over 15%. These are excellent numbers for any type of investment.

Another reason to start a position in this company today is the fact that management has continued to raise the dividend at a rate close to 20% per year, despite its recent problems. This tells me that management believes that this situation can be managed and that they expect a positive conclusion to these problems. 

All in all, I think Target is a great company with a great future. Their security problems are being fixed and their expansion into Canada (and future international markets) is being overhauled. I think both of these events have been seminal events for this company and that the lessons learned will actually improve the company long term. 

I believe my assessment is correct and that the only mistake I may be making is one of pure timing. As a result, I intend to start a small position in this company and I'll add to that position as the numbers and the chart's indicators confirm my thesis. I think this will get me properly positioned in this security and keep my attention on this company's fundamentals and its future.

Life Interactive Chart

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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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