Target: The Worst May Be Over


It appears that a lot is going wrong for Target (NYSE:TGT) this year. Supply chain issues made the company order too many products that consumers didn’t want, such as clothing and furniture, causing the retailer to slash prices to move inventory.

The company was forced to cut guidance twice, and the recent earnings miss added to the strain. Also, with more shoppers being strapped for cash and inflation on the rise, they are spending less on stuff and more on food, a niche where Target pales in scale compared to competitors like Walmart (NYSE:WMT).

However, with Target’s stock already down 29% in 2022 compared to the S&P 500’s 18% decline over the same time frame, most of the bad news seems to be priced into the stock. There are still many positive aspects of the retailer, from its increasing market share to its dividend,

Target’s Q2 earnings results, which were released on August 17, were disappointing, with a profit of 39 cents per share below expectations of 72 cents. The results proved so disappointing that even some long-term shareholders became uneasy.

Chief investment officer of Smead Capital Management and longtime Target shareholder Bill Smead refers to the retailer as a wonderful company with a sticky customer base. He believes it makes sense to buy Target following any dips that send the stock down in the range of $140 to $150 from the current $165 and add small increments from that range based on the investor’s risk tolerance and time horizon.

While everyone would like to wait for a better entry point, it doesn’t always present itself, so even if the stock could further decline, buying now may be the right move.

Max Wasserman, the founder of Miramar Capital, believes that the stock has already bottomed out. He thinks shares could go back above $200 next year, which isn’t overly optimistic considering the company is growing earnings and has a great dividend yielding about 2.6%.

And he is right about earnings. Even at $8.16, the retailer makes roughly $3 per share more than it did in the pre-pandemic era. The company’s market share increased by $9 billion in 2020, and with store traffic remaining largely positive, sales are expected to rise 3.5% year over year to a record $110 billion in 2022.

Although consensus estimates for the year and the next one have reduced in the past couple of months, analysts still project EPS will rebound by at least 45% to $11.97 in fiscal 2023 ending in January 2024. That would make it Target’s most profitable fiscal year ever aside for 2021.

However, thanks to a slowing economy and surging inflation, some investors aren’t as confident that those projections won’t decline further.

Their fears might be overdone

Edward Kelly, an analyst at Wells Fargo who recently upgraded Target to Overweight, notes that forecasts for next year’s profits among buy-side analysts are approximately $11 lower than the sell-side average of $12. He, however, believes that Target could earn as much as $12.70 in fiscal 2023 due to this year’s margin issues being temporary and the retailer showing resilience during mild consumer recessions.

Interestingly, even at that consensus, the retailer appears cheap, especially compared to peers. Currently, target’s shares trade at 14.4x expected 12-month forward earnings. That is lower than the S&P 500’s projected 16.8x and the retailer’s 10-year average of 15.9x. It also trades at a 33% discount to Walmart’s 21.4x.

Although Walmart has experienced its own problems, its massive amount of grocery sales has shielded it from inventory problems faced by both companies helping it better navigate the economic turmoil. However, at some point, the trend is likely to reverse, leaving target as the more attractive choice.

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