TGT Stock Study (7-18-23)

Posted by Mark on September 21, 2023 at 07:06 | Last modified: July 18, 2023 14:45

I recently did a stock study on Target Corp. (TGT) with a closing price of $130.01. Previous studies are here and here.

CFRA writes:

     > Incorporated in 1902 and headquartered in Minneapolis, Target
     > Corporation is one of the largest retailers in the U.S. As of
     > January 29, 2022, the company operated 1,926 Target locations
     > in the U.S. with 243.3 million square feet of floor space, up
     > from 1,897 stores with 241.6 million square feet of floor
     > space twelve months earlier. Target currently has stores in
     > all 50 states and the District of Columbia. Its stores
     > generally cater to middle- and upper-income consumers,
     > carrying a broad assortment of fashion apparel, electronics,
     > home furnishings, household products, and other general
     > merchandise. Target.com offers a more extensive selection of
     > merchandise than the company’s physical stores, including
     > exclusive online products.

Over the past decade, this mega-sized company (revenue > $50B) has grown sales and earnings at annualized rates of 4.9% and 11.9%, respectively. Lines are mostly up except for dips in sales (’16) and EPS (’16 and ’22). PTPM leads peer and industry averages throughout the decade despite a disappointing ’22 contributing to a last-5-year mean of 5.5%.

Also over the past decade, ROE leads peer and industry averages by increasing from 12.0% (’13) to 25.0% (’22) and posting a last 5-year mean of 31.9%. Debt-to-Capital is higher than peer and industry averages, increasing from 45.9% (’13) to 62.9% (’22) with a last-5-year mean of 55.7%. Quick Ratio is chronically low (0.07 in the last quarter), but Interest Coverage is 7.6. Value Line gives a B++ rating for Financial Strength while M* assigns an Exemplary rating for Capital Allocation.

With regard to the EPS dip [crash: down 57.6% YOY] in ’22, Value Line wrote:

     > Followers of this story will recall that the bottom line last year
     > was torpedoed when management announced a serious inventory
     > bloat would be worked down by across-the-board discounting.
     > Shortly thereafter, a clearance run event was held to get
     > shoppers to spend at the tail end of the holiday season, thus
     > again clearing inventory space for items geared toward warmer
     > weather. The end result was a sharp drop in profitability and
     > a full-year earnings figure of just $5.98 a share.

With regard to sales growth:

• CNN Business projects 0.9% YOY and 1.3% per year for ’24 (FY ends Jan 31) and ’23-’25 (based on 29 analysts).
• YF projects YOY 1.2% and 1.7% for ’24 and ’25 (31 analysts).
• Zacks projects YOY 1.1% and 1.9% for ’24 and ’25, respectively (13).
• Value Line projects 3.6% annualized growth from ’23-’28.
• CFRA projects 0.1% YOY and 1.9% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year ACE of 1.6% per year and 3.0% annualized growth for the next five years in its analyst note.

I am forecasting conservatively at 1.0% per year.

With regard to EPS growth:

• CNN Business projects 48.4% YOY and 35.7% per year for ’24 and ’23-’25, respectively (based on 29 analysts), along with 5-year annualized growth of 8.9%.
• MarketWatch projects 24.2% and 18.3% per year for ’23-’25 and ’23-’26 (35 analysts).
• Nasdaq.com projects 24.3% YOY and 18.5% per year for ’25 and ’24-’26 (17, 16, and 5 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized contraction of 0.6%.
• YF projects YOY growth of 36.4% and 23.9% for ’24 and ’25 (32) along with 5-year annualized contraction of 7.5%.
• Zacks projects YOY growth of 36.1% and 24.3% for ’24 and ’25 (16) along with 5-year annualized growth of 15.4%.
• Value Line projects 24.5% growth per year from ’23-’28.
• CFRA projects 34.6% YOY, and 30.4% growth per year for ’24 and ’23-’25 along with a 3-year CAGR of -9.0%.
• M* projects long-term annualized growth of 21.1%.

I get suspicious when I see a big YOY change accompanied by diametrically-opposed estimates. The opposing long-term estimates here are -7.5% and -0.6% vs. 24.5% and 21.1%. I assume the time frames to be identical, but what if they’re not? I go into detail about this at the second link above.

Given the high degree of uncertainty (two negative long-term estimates), I am forecasting conservatively by more than halving the 6-long-term-estimate mean to 4.0% per year. I will use the 2022 trendline of $9.52/share as the initial value since ’22 EPS is unusually low (see discussion above).

My Forecast High P/E is 15.0. Over the past decade, high P/E has ranged from 14.8 (’17) to 42.6 (upside outlier in ’22) with a last-5-year mean (excluding the outlier) of 19.8. The last-5-year-mean average P/E is 15.4. I am forecasting near the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 10.5. Over the past decade, low P/E has ranged from 9.1 (’17) to 22.9 (’22). Low P/E has been less than 14.2 in every year since ’14, which makes the 22.9 somewhat of an upside outlier. Excluding that, the last-5-year mean is 11.0. I am forecasting near the low end of the range [only ’17 and ’20 (10.4) are lower].

My Low Stock Price Forecast (LSPF) is the default based on $9.52/share initial value. This is 23.1% less than the previous close and 20.1% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 22.4% (’21) to 66.2% (’22). The last-5-year mean is 41.3%. I am forecasting conservatively at 22.0%.

These inputs land TGT in the HOLD zone with a U/D ratio of 1.5. Total Annualized Return (TAR) is 7.4%.

PAR (using Forecast Average—not High—P/E) of 4.3% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 131 studies over the past 90 days (my study and 48 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 3.9%, 10.1%, 19.5, 11.5, and 41.3%, respectively. I am lower across the board. Value Line projects an average annual P/E of 15.0, which is lower than MS (15.5) and higher than mine (12.8).

MS high/low EPS is $10.32/$5.87 vs. my $11.58/$9.52 (per share). Many MS studies use ’22 for low EPS, which I think is unreasonable since the well-documented inventory issues color this as a nonrecurring event. This skews the entire MS EPS range lower (e.g. Value Line and M* have projected high EPS of $17.90/share and $15.57/share).

MS LSPF of $82.20 implies a Forecast Low P/E of 14.0 vs. the above-stated 11.5. MS LSPF is 21.8% greater than the default value of $5.87/share * 11.5 = $67.51, which results in much more aggressive zoning. MS LSPF is 17.8% less than mine, however. MS LSPF is a level not seen since 2019 while the default value has not been seen since 2018. The 21.8% discrepancy is much larger than usual. Further evidence of chaos?

Although tempting, I can’t quite reject MS outright and call MOS healthy in the current study. I would call it moderate.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two metrics I have recently begun to monitor. PEG is 1.03 (Zacks) while Relative Value is 1.44 (M*). The latter is suggestive of an overvalued stock, but I would argue 1.44 to be artificially high due to ’22 EPS.

I am also starting to familiarize myself with Kim Butcher’s “quick and dirty DCF.” According to this method, the stock should be valued at 10 * [$24.55 – ($0.00 + $6.40)] = $181.50 (i.e. stock undervalued by 28.0%).

I would look to re-evaluate TGT under $118/share.

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