Will Recent News Hurt Target’s Stock?

With shares of Target (NYSE:TGT) trading around $59, is TGT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Target operates general stores in the United States as well as online where it sells merchandise at discounted prices. It operates in three segments: U.S. Retail, U.S. Credit Card, and Canadian. Target’s online presence is designed to enable consumers to purchase products either online or by locating items in one of its stores with the aid of online research and location tools. Groceries, clothing, household items, and general merchandise can be found at Target, making it an efficient shopping experience for consumers throughout the nation.

Target is getting sued again. And this time so is Trustwave Holdings Inc., the retailer’s provider of credit card security services. Reuters reported Wednesday that Target and Trustwave have been sued by two banks on account of ”monumental” losses the banks say card issuers will incur because of the retailer’s large-scale data breach. The two banks that filed the lawsuit Monday in Chicago federal court are Trustmark National Bank and Green Bank N.A. They charge that Target failed to properly secure its customer data and to heed warnings about its security gaps, and that’s why more than 40 million payment card records were compromised, along 70 million other records, in its devastating security breach. This certainly isn’t the first lawsuit Target has faced for its holiday season security breach that stretched from November 28 to December 15, but Reuters highlighted that it’s the first that also draws in Trustwave, Target’s credit card security client. Target had outsourced some of its data security services to the Chicago-based company, and Trustmark National Bank and Green Bank NA are now alleging that the privately held group failed to bring Target’s computer systems up to industry standards and found “no vulnerabilities” as late as September 20. The banks say this is unacceptable for a company that boasts an expertise in payment card industry compliance.

T = Technicals on the Stock Chart are Mixed

Target stock has struggled to make significant progress over the last couple of years. However, the stock is currently moving higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Target is trading between its rising key averages which signal neutral price action in the near-term.

TGT

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Target options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Target options

18.78%

20%

18%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Average

Average

May Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Target’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Target look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-44.9%

-43.75%

-10.38%

-25.96%

Revenue Growth (Y-O-Y)

-5.32%

1.95%

2.01%

-0.95%

Earnings Reaction

7.04%

-3.45%

-3.6%

-4.01%

Target has seen decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Target’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Target stock done relative to its peers, Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Kohl’s (NYSE:KSS), and sector?

Target

Wal-Mart

Costco

Kohl’s

Sector

Year-to-Date Return

-5.20%

-3.05%

-5.92%

0.19%

-2.49%

Target has been an average performer, year-to-date.

Conclusion

Target operates discount general stores across North America where consumers continue to enjoy their shopping experience. The company is getting sued again. The stock has struggled to make significant progress, but is currently moving higher. Over the last four quarters, earnings have been decreasing while revenues have been mixed, which has produced conflicting feelings among investors. Relative to its peers and sector, Target has been an average year-to-date performer. WAIT AND SEE what Target does the rest of this quarter.

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