TGT with Nobias technology: Target Shares Are Down 8% Since Their Recent Earnings Report. Is This A Buying Opportunity?
In late May, after Target (TGT) reported its first quarter earnings, we published an article on the stock, highlighting the strong bullish sentiment surrounding the company coming from the credible author community tracked by the Nobias algorithm. The analyst opinions at the time highlighted the company’s strong operational results, especially with regard to its growing eCommerce segment and the company’s overall success as an omnichannel retailer.
Analysts were bullish on the company’s diversified approach to physical retail, its success in the branded goods space, and the overall wide moat that the company has built over the years, relative to its competitors in the big-box retail segment. Analysts highlighted Target’s relatively high valuation (compared to historical averages), but noted that the company’s digital sales growth, defensive cash flows, and strong balance sheet justified the premium being placed on shares.
Overall, the vast majority of blue chip analysts (which maintain 4 and 5-star ratings by the Nobias algorithm) were “Bullish” on shares and now that Target has recently reported another quarter’s worth of data, we wanted to check back in to see how well the stock (and the sentiment surrounding it) were performing.
In late May, Target shares were trading in the $225 area. Today, the company’s share price is $245.41. That represents a gain of approximately 9%. However, in recent weeks, we’ve seen TGT shares experience a bit of a dip, trading down some 8.1% from the $267.06 52-week highs that the company hit in mid-August, just prior to its second quarter earnings report.
Even with the recent sell-off in mind, the company’s recent performance compares favorably to the roughly 5% gains that the S&P 500 has posted during the period of time since our last article. With this in mind, it appears that the bullish sentiment expressed by Nobias blue chip rated analysts was justified. But, what’s in the past is in the past. In the stock market, estimations of future cash flows determine share price and therefore, we wanted to take a look at the recent Q2 results and hte analyst commentary attached to them to see whether or not the company’s outlook remains bright in spite of the rising share price (and valuation), or if the negative momentum that has arose since the second quarter results were published potentially points towards a deeper discount being applied to shares.
Target beat Wall Street’s expectations on both the top and bottom lines, during its Q2 report. Mark Reilly, Managing Editor, Minneapolis / St. Paul Business Journal and a Nobias ranked 4-star analyst, recently published an article which highlighted TGT’s quarterly numbers. Regarding the company’s bottom-line, he said, “For the quarter ended July 31, the Minneapolis-based company said it earned $1.8 billion, or $3.65 per share, up from from $1.7 billion, or $3.35 per share, in the same period a year ago. Excluding one-time impacts, the retailer earned $3.64 per share. That's higher than the $3.49 per share expected by analysts surveyed by Refinitiv as reported on CNBC.
When it came to Target’s sales figures, Reilly continued, “Sales rose 9.5% to $25.2 billion from just under $23 billion in the year-ago period, also beating analysts' estimates of $25.08 billion. Comparable sales rose 8.9%, slightly above estimates.” Reilly noted that the back-to-school shopping season helped to bolster Target’s results. He highlighted the fact that apparel was a strong segment for the company, posting double digit growth during the quarter. He also said that foot traffic was up in the physical locations by 12.7%, which was impressive, especially compared to the digital sales, which were only up 10%.
Niloofer Shaikh, a news editor at Seeking Alpha, as well as a Nobias 4-star rated analyst, recently posted a piece highlighting Target’s Q2 results as well. Shaikh notes that Target’s Comparable sales came in at +8.9% versus consensus of 8.18%. Shaikh continued, noting that in the eCommerce realm, “Digital comparable sales grew 10%, following growth of 195% last year.” Shaikh highlighted a new shareholder return initiative by TGT, stating, “The board of directors has approved a new $15B share repurchase program.”
During Target’s Q2 conference call, the company’s CFO, Michael Fiddelke, touched upon Target’s shareholder return programs, saying, “Beyond our capital investments, we paid dividends of $336 million in the second quarter, and we returned another $1.5 billion through share repurchases at an average price of just over $230. And as we announced today, our board has approved a new $15 billion share repurchase authorization, which will allow us to continue buying back shares once the current $5 billion programs are completed.”
Fiddelke also highlighted the company’s focus on the dividend. Regarding the company’s capital deployment, he said, “First, we invest fully in our business and projects that meet our strategic and financial criteria. Then we look to support the dividends and build on our record of annual dividend increases, which we've maintained every year since 1971.”
Finally, Shaikh put a spotlight on the company’s forward looking guidance, saying, “For FY2021, the company expects high single digit growth in comparable sales, near the high end of the previous guidance range of positive single-digit comparable sales growth and expects operating income margin rate of 8% or higher.”
While Target’s safe and reliable dividend appears to provide peace of mind to investors, it looks like the company's growth outlook - even though it was near the top-line of prior guidance - is the catalyst behind the stock’s recent negative momentum.
Target’s continued same-store sales growth and strong market share gains in important areas such as the beauty and the electronic (both of which were highlighted by management during the Q2 conference call) point towards continued operational success.
However, lower margins (TGT’s gross margins came in at 30.4% during Q2, down roughly 50 basis points from last year’s 30.9% figure) highlight the potential for supply chain constraints, waning demand, and/or rising labor costs and capital expenditures to result in slowing earnings-per-share growth.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Due to Target’s premium valuation - right now, shares are trading with a forward price-to-earnings ratio of 19x - any potential profit related uncertainty is likely to result in selling pressure. To put the company’s current valuation into perspective, Target’s 5 and 10-year average price-to-earnings ratio are roughly 15x. During the last 3 years, Target’s average P/E ratio is 15.6x. Without a doubt, the current forward looking valuation is above historical norms.
Analysts expect Target to generate 37% earnings-per-share growth in fiscal 2021, which is well above historical averages. However, right now, the analyst consensus estimate for fiscal 2022 EPS growth is 0%. Target generated EPS growth of 14% in fiscal 2018, 19% in fiscal 2019, and 47% in fiscal 2020. Assuming that the 37% estimates in 2021 come to fruition, this will represent a deceleration in growth. The 0% expectation in fiscal 2022 implies that much of the future growth has been pulled forward, due to changes in consumer spending habits during the pandemic.
These flat future growth estimates, relative to the current premium, appear to be inspiring fear in the market. Yet, this fear hasn’t permeated into the Nobias credible analyst community. Right now, 92% of the credible analysts that we track have a “Bullish” outlook on TGt shares. The average analyst price target on Target shares, amongst the credible authors that we track with the Nobias algorithm, currently lies at $257.17. Compared to TGT’s current share price of $245.41, this implies upside potential of approximately 4.8%.
Disclosure: Nicholas Ward has no position in TGT. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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