Is Target a Risky Investment?

With shares of Target Corp. (NYSE:TGT) trading at around $70.64, 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:

C = Catalyst for the Stock’s Movement

Target blamed the weather! While the weather might play a role in dampening expectations, it’s rarely going to make a substantial impact on results. This is especially the case for Target, which is diversified enough in a geographical sense that weather shouldn’t play a major player. Regardless of the excuse given, Target now expects comps to be flat for the quarter. Comps were originally expected to come in between flat and a 2 percent increase. Sales and earnings are also expected to come in slightly lower than expected. However, annual EPS is expected to grow 11.87 percent over the next five years. There are many other positives for Target as well, which include:

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  • Consistent dividend increases
  • Buying back $5 billion of shares over the next two years
  • Analysts like the stock: 15 Buy, 10 Hold, 1 Sell
  • Increase in online sales
  • Growth in Canada
  • Untapped growth potential on global basis
  • Consistent improvements in revenue on annual basis
  • Consistent improvements in earnings on annual basis
  • Free cash flow expected to triple by 2015
  • Strong margins (compared to peers)
  • Declining capital expenditures
  • Remodeling 100 stores for improved customer experience and product placement

In regards to Target’s online presence, it’s a more popular site than many people would think. For example, it ranks #319 globally and #61 in the United States. That’s a lot of traffic! However, over the past three months, pageviews have declined 32.99 percent, time-on-site has declined 5 percent, and the bounce rate has increased 9 percent. These aren’t good numbers, but keep in mind that they’re coming in after the holiday season.

For comparative purposes, Wal-Mart Stores Inc. (NYSE:WMT) is ranked #174 globally and #44 in the United States. Wal-Mart is way ahead globally, but Target has a chance to catch up domestically, which would be a considerable blow to Wal-Mart considering the ever-increasing trend of online shopping. Wal-Mart isn’t one to sit around and hope for the best if things are going poorly. Therefore, Target might want to come up with a way to increase online traffic soon. Over the past three months for Wal-Mart, pageviews have declined 38.02 percent, time-on-site has declined 10 percent, and the bounce rate has increased 10 percent. Evidently, the poor numbers are likely an industry trend. Therefore, Wal-Mart might pick up the pace if Target does.

The chart below compares fundamentals for Target, Costco Wholesale Corporation (NASDAQ:COST), and Wal-Mart. Target has a market cap of $45.34 billion, Costco has a market cap of $47.56 billion, and Wal-Mart has a market cap of $258.72 billion.

TGT

COST

WMT

Trailing   P/E

15.64

24.42

15.65

Forward   P/E

12.78

21.62

13.36

Profit   Margin

4.09%

1.90%

3.62%

ROE

18.52%

17.33%

22.42%

Operating   Cash Flow

$5.32 Billion

 $3.34 Billion

  $25.59 Billion

Dividend   Yield

2.00%

1.00%

2.40%

Short   Position

3.10%

1.30%

1.70%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Target is weaker than the industry average of 0.70. It’s also weaker than the debt-to-equity ratios for Costco and Wal-Mart. The debt-to-equity ratio for Target isn’t terrible, and it won’t be a big deal in this environment, but the only guarantee in the markets is change, and interest rates will eventually increase.

Debt-To-Equity

Cash

Long-Term Debt

TGT

1.07

$788.00 Million

$17.65 Billion

COST

0.47

$5.65 Billion

$4.87 Billion

WMT

0.66

$7.81 Billion

$54.23 Billion

 

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T = Technicals Have Strong  

Target has underperformed its peers over one-year and three-year time frames, but it has been the best performer in this group so far this year.

1 Month

Year-To-Date

1 Year

3 Year

TGT

3.20%

20.07%

24.03%

32.82%

COST

2.38%

10.33%

32.71%

105.00%

WMT

4.72%

15.59%

35.98%

57.53%

 

At $70.64, Target is trading above all its averages.

50-Day   SMA

67.10

100-Day   SMA

64.09

200-Day   SMA

63.51

 

E = Earnings Have Been Solid             

Earnings and revenue have consistently improved on an annual basis. This is a great sign.

2009

2010

2011

2012

2013

Revenue   ($)in   billions

64.95

65.36

67.39

69.86

73.30

Diluted   EPS ($)

2.86

3.30

4.00

4.28

4.52

 

When we look at the previous quarter on a year-over-year basis, we see an improvement in revenue and earnings. Revenue and earnings also improved on a sequential basis.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

21.29

16.87

16.78

16.93

22.73

Diluted   EPS ($)

1.45

1.04

1.06

0.96

1.47

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Yes, gasoline prices have declined. This is a big plus, but there are still a lot of headwinds, including underemployment, increased taxes, and weak consumer sentiment. As a result, there was a 0.4 percent in decline in retail sales in March.

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Conclusion

Target has a lot going for it on a company-specific basis, but the performance of the stock market as a whole and simple logic don’t match at the moment. There are many economic headwinds, and without central bank support and low interest rates, this market would be nowhere near where it’s trading now. If a bear market were to present itself, then Wal-Mart would be a safer option than Target. In this environment, it would be very difficult for Target to meet expectations. Wal-Mart might also miss expectations, but it’s a much bigger ship to turn. It would also potentially benefit from a weaker economy due to its reputation for steep discounts. The biggest competition for Wal-Mart in this environment would be dollar stores.

All factors considered, Target is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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