Thursday, May 26, 2016

After the Fall, Target is a Clear Buy

     All investments involve risk.  So does this one.  Please talk with an adviser before buying this stock.  And, as always, remember that I could be wrong about this.

     Last week, Target stock fell from ~83.5 to 65.5, or 21.5%.  This absolute percentage amount is over the 20% level reserved for bear markets.  Several facts from the 1Q results caused the drop.  Y/Y sales declined 5.4%, which was more concerning since same store sales increased slightly over 1%.  Overall growth was the lowest since 2014.  Most concerning to analysts was the retailer’s forward guidance, which target projected at $1.10-$1.20 while analysts were forecasting $1.36.  But the report has hardly all negative.  Digital comparable sales increased 23%.  And the same store sales figures are encouraging, especially for a retailer Target’s size.  Most importantly, the sell-off made Target attractive from a valuation level: their current PE 13.12 and their forward PE is 12.33   
     This drop occurred during a weak first quarter retail environment.  In the latest GDP report, personal consumption expenditures increased a disappointing 1.9% Q/Q.  Real retail sales were flat for the January-March period.  This caused disappointing first quarter fiscal results that led to a 14% drop in the retail sector ETF (the XRTs).  And retail executives were very circumspect in their first quarter earnings calls.  But several recent statistics could indicate the 1Q malaise is over.  The latest 1.3% rise in retail sales is very encouraging.  Analyzed in isolation, this release could be viewed as statistical noise.  But the recent 16.6% rise in new home sales shows the U.S. consumer is more than willing to spend, potentially foreshadowing a much stronger 2Q GDP result.
     It’s important to place Target’s quarterly results into a longer time frame.  Target’s total revenue has fluctuated between $72.5 and $73.7 billion over the last 5 years.  COGS and operating expenses have been consistent, indicating the company has control of expenses.  EBIT fluctuated between 8.89% and 10.67% since 2010.  And they have reported positive earnings in all but 1 of the last 5 years.  This is a consistent long-term performer that, so far, simply experienced a bad quarter.
     There are two potential market scenarios going forward; either makes Target a buy. The company is a discount retailer, which naturally attracts shoppers during economic slowdowns.  In fact, their gross revenue increased $9.25 billion between 2007 and 2009.  And if the economy continues growing slowly, they’re still a buy.  They have solidly positioned themselves as a discount store that is attractive to higher-end shoppers.  A recent Facebook meme perfectly captured this sentiment: “Target: where you’ll pay an extra $5 to not be seen at Wal-Mart.”  The stock is trading at the bottom of their 52-week range with a 3.23% dividend yield and a 41% pay-out ratio.  The company also has a buy-back plan in play.  These factors add up to a great buying opportunity.