TGT Stock Study (10-20-23)

Posted by Mark on January 23, 2024 at 07:05 | Last modified: October 20, 2023 12:17

I recently did a stock study on Target Corp. (TGT) with a closing price of $108.36. Previous studies are here, 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 (FY ends Jan 31). Lines are mostly up except for dips in sales (’17) and EPS (’17 and ’23). PTPM leads peer and industry averages throughout the decade despite a disappointing ’23 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% (’14) to 25.0% (’23) with a last 5-year mean of 31.9%. Debt-to-Capital is higher than peer and industry averages, increasing from 45.9% (’14) to 62.9% (’23) with a last-5-year mean of 55.7%.

Quick Ratio is chronically low (0.08 in the last quarter), but Interest Coverage is 8.8. Value Line gives a B++ rating for Financial Strength while M* assigns an “Exemplary” rating for Capital Allocation.

With regard to 2023 EPS decline, 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 and ’23-’25 (based on 29 analysts).
• YF projects YOY 1.8% contraction and 0.8% growth for ’24 and ’25, respectively (29 analysts).
• Zacks projects YOY 1.8% contraction and 0.6% growth for ’24 and ’25, respectively (13).
• Value Line projects 3.2% annualized growth from ’23-’28.
• CFRA projects contraction of 1.8% YOY and 0.4% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year ACE of 0.8% contraction per year.

I am forecasting less than the long-term estimate at 1.0% per year.

With regard to EPS growth:

• CNN Business projects 36.0% YOY and 30.0% per year for ’24 and ’23-’25, respectively (based on 29 analysts), along with 5-year annualized growth of 15.0%.
• MarketWatch projects 27.3% and 21.8% per year for ’23-’25 and ’23-’26, respectively (36 analysts).
• Nasdaq.com projects 18.3% YOY and 14.3% per year for ’25 and ’24-’26 (17, 17, and 7 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 13.4%.
• YF projects YOY 25.7% and 18.5% for ’24 and ’25 (30) along with 5-year annualized growth of 18.3%.
• Zacks projects YOY 25.9% and 18.3% for ’24 and ’25 (17) along with 5-year annualized growth of 12.7%.
• Value Line projects 23.2% growth per year from ’23-’28.
• CFRA projects 23.3% YOY and 17.8% per year for ’24 and ’23-’25 along with a 3-year CAGR of -15.0% [NOTE: the 3 years must begin (a long-time curiosity of mine) in ’22 as discounting $13.56/share by 15%/year results in $8.33 for ’25, which is very close to the stated $8.35/share].
• M* projects long-term annualized growth of 15.7%.

The long-term estimates are dramatically higher than three months ago. The mean (of six) has increased from 10.3% to 16.4%. This is primarily due to two negative estimates (Seeking Alpha at -0.6% and YF at -7.5%) that are now significantly positive. It’s almost mind-boggling to imagine the arithmetic average of ~30 analysts changing so much over one quarter. I sometimes wonder if I’m looking at data importation errors on the website. One such error, which could never actually be confirmed, can dramatically affect my forecast.

I am forecasting below the long-term-estimate range at 12.0% per year. I will use ’23 EPS of $5.98 as the initial value. Three months ago, I went with the trendline since $5.98/share—down 57.6% YOY—seemed unreasonably low. Owing largely to the negative long-term estimates just discussed, however, three months ago my forecast EPS growth rate was only 4.0%.

My Forecast High P/E is 15.0. Over the past decade, high P/E ranges from 14.8 (’18) to 42.6 (upside outlier in ’23) 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 ’18 is lower).

My Forecast Low P/E is 10.5. Over the past decade, low P/E ranges from 9.1 (’18) to 22.9 (’23). Low P/E has been 14.2 or less since ’15, which makes the 22.9 seem like an outlier. Excluding that, the last-5-year mean is 11.0. I am forecasting near the bottom of the range [only ’18 and ’21 (10.4) are lower].

My Low Stock Price Forecast (LSPF) is $80.00. This is a rare instance where the default value of $62.80 is unreasonably low. That would be 42.0% less than the previous close and a whopping 39.0% less than the 52-week low. The stock has already fallen 59.7% from its all-time high (2021) and with EPS cratering in ’23, growth is expected moving forward. Sticking with the default in this case feels like trying to fit a square peg in a round hole. Instead, I am going with a price 26.2% less than the previous close and 22.3% less than the 52-week low. In my opinion, that is still conservative.

Over the past decade, Payout Ratio ranges from 22.4% (’22) to 66.2% (’23). The last-5-year mean is 41.3%. I am forecasting below the range at 22.0%.

These inputs land TGT in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 9.3%.

PAR (using Forecast Average—not High—P/E) of 6.1% is less than I seek for a mega-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 120 studies (my study and 62 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 3.7%, 10.0%, 19.0, 11.5, and 41.3%, respectively. I am lower on all but EPS growth (12.0%). Value Line’s projected average annual P/E of 15.0 is just lower than MS (15.8) and higher than mine (12.8).

MS high / low EPS are $11.32 / $6.89 versus my $10.54 / $5.98 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $17.00. I am lowest of the three.

MS LSPF of $92.20 implies a Forecast Low P/E of 13.4: more than the above-stated 11.5. MS LSPF is 16.4% greater than the default $11.32/share * 11.5 = $79.24, which results in more aggressive zoning. Like mine, other studies may also have overridden default to select a higher LSPF. MS LSPF is 15.3% greater than mine.

My TAR (over 15.0% preferred) is much less than MS 15.3%. MOS seems robust in the current study.

I track a few different valuation metrics. PEG is 1.1 per Zacks and my projected P/E: fairly valued. Relative Value per M* [(current P/E) / 5-year-mean average P/E] is fair at 1.0. Although these metrics often conflict, they are quite consistent here.

TGT is a BUY under $99. With a forecast high price around $158, TAR should meet my 15% criterion around $79/share.