I see a company trying to recover from a couple of serious mistakes that are putting a lot of downward pressure on its stock. I also see a strong group of followers that are Target groupies that are trying to support the stock and push it higher. I think the shorts are gonna win this fight and the stock is gonna get cheaper.
Target is a great company with a great history but its stock is currently under pressure because of last year's security breach and its misstep in Canada. They are making great strides in fixing both of these situations but their public relations have left a lot to be desired. This stock is a great long term hold but its too early for me to accumulate.
- Revenues were down slightly and earning were down significantly in 2014 (fiscal year ends in January)
- The company is still trying to recover from last fall's drop in sales due to their credit card security breach
- The Canadian operations are still faltering and the head of Canadian operations just resigned
- Target is a solid company to accumulate if bought at the right price because sales and profits will eventually recover
Target Corporation (TGT) operates general merchandise stores in the United States. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; hardlines comprising 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. As of January 30, 2014, the company had 1,921 stores, including 1,797 stores in the United States and 124 stores in Canada. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. (Daily Chart) (Weekly Chart)
22 May 2014
1yr Target $60.81
1yr Cap Gain 8.60%
1yr Tot Return 11.67%
3yr DGR 21.26%
5yr DGR 21.62%
Payout Ratio 53.74%
EPS (ttm) $3.08
EPS next yr $4.73
The stock then almost immediately bounced back up to around $66 before the scope of the Canadian problem became well known. It then fell to around $53 for another sizable loss of shareholder wealth. Today it's trading in the mid $50s and appears to be stuck. It's just a matter of determining what this company is worth, both today and going forward.
For anyone looking to invest in this company, the only thing they have to count on are the future estimates of revenues and earnings (other information is available but the 2014 distortion affects the calculus). With the price of the stock today, the P/E ratio of Target is 18.18 while the P/E ratio of WalMart, a much larger competitor, is less than 16. At the comparable level Target would be selling for approximately $48 per share. Assuming the estimates for 2015 are correct (a big if), a year from now the stock should be trading at $62 per share. That's a pretty big increase.
But giving them the benefit of the doubt, they show revenues and earnings increasing very nicely over the next two years. With earnings estimates at $4.61 in 2016, the analysts are telling me that this could be a $74 stock by Jan 2016. That's a 32% increase from today's price but it would be an almost 50% increase if I could get the stock for around $50.
Below are the growth rates for revenues, earnings, and dividends. I've included the 3 year, 5 year, and 10 year growth rates based both years 2013 and 2014 because of the down turn in both the revenues and earnings for 2014. It demonstrates how well things were going until 2014. What's also obvious is that although things went south in 2014, the dividend increases continued to move higher at a growth rate that's probably unsustainable. This can easily be seen in the payout ratios. Starting out in the single digits 10 years ago, the continual dividend growth rates at twice the rate of revenue and earnings growth has pushed the payout ratio up to over half the earnings. This level will continue to affect revenues and earnings since the reduced level of retained earnings will inhibit the company's ability to grow the business without taking on additional debt.
Revenues Growth Rates
3yr = 2.48% (2014) 3.85% (2013)
5yr = 2.25% (2014) 10.79% (2013)
10yr = 4.18% (2014) 5.25% (2013)
Earnings Growth Rates
3yr = -8.37% (2014) 10.94% (2013)
5yr = 1.42% (2014) 6.30% (2013)
10yr = 4.32% (2014) 9.58% (2013)
Dividend Growth Rates
3yr = 21.26% (2014) 26.92% (2013)
5yr = 21.62% (2014) 20.64% (2013)
10yr = 19.84% (2014) 19.11% (2013)
- WalMart Stores Inc (WMT)
- Costco Wholesale Corporation (COST)
- Dollar General Corporation (DG)
- Dollar Tree, Inc (DLTR)
- Family Dollar Stores Inc (FDO)
- Zulily Inc (ZU)
- PriceSmart Inc (PSMT)
- Big Lots Inc (BIG)
I'll look to accumulate stock in this company on dips in the price. Since I don't believe the dividend growth rate of the past is sustainable, I'll try to maximize available capital gains for the next couple of years by waiting to buy this stock until it falls back to the $51-$52 area allowing for a 45% gain over 2 years.
Good Luck and Good Trading.