TGT with Nobias technology: Are Target Shares Still Attractive After Their Post-Earnings Rally?
We’ve noticed an uptick in articles/reports published on Target (TGT) shares in recent weeks, due to the company’s volatility. In early 2022, Target shares experienced a double digit sell-off. However, more recently, the company posted its Q4 earnings report, which inspired a double digit bounce back rally.
Target was a popular stock in 2021. The company grew its earnings-per-share by 44% last year. However, during the first two months of the year, TGT shares were down roughly 13.5%. This weakness put Target on the radar of many value investors. However, the sentiment surrounding Target shares recently shifted. TGT reported Q4 earnings on March 1st and since then, its shares have risen by approximately 12%.
Here we highlight the data reported by the credible authors/analysts that the Nobias algorithm tracks coming into the Q4 report, as well as the current slate of opinions being expressed by these individuals, to see whether or not Target shares are still an attractive bargain, even after their recent double digit rally.
Sean Solarzano, a Nobias 4-star rated author, recently published a report breaking down Wall Street’s expectations for Target’s fourth quarter earnings report. He said, “Wall Street analysts expect that Target Co. (NYSE:TGT) will announce earnings per share (EPS) of $2.86 for the current quarter, Zacks Investment Research reports.” Solarzano continued, “Eight analysts have provided estimates for Target’s earnings, with the highest EPS estimate coming in at $3.01 and the lowest estimate coming in at $2.52. Target posted earnings per share of $2.67 during the same quarter last year, which indicates a positive year-over-year growth rate of 7.1%.”
TGT March 2022
Solarzano also touched upon full-year expectations and 2022 estimates, saying, “On average, analysts expect that Target will report full-year earnings of $13.19 per share for the current fiscal year, with EPS estimates ranging from $12.85 to $13.40. For the next financial year, analysts anticipate that the business will report earnings of $13.24 per share, with EPS estimates ranging from $11.00 to $13.77.”
Amy Baxter, a Nobias 4-star rated author published a report in mid-February that seemed to predict a solid beat during Q4, based upon recent foot traffic data in Target stores. She wrote, “Target is having an exceptional period of foot traffic, according to recent data from Placer.ai.” Baxter continued, “In fact, Target is outpacing Walmart when it comes to customer visits, while both retailers are facing ongoing challenges exacerbated by the COVID-19 pandemic.”
Regarding Target’s largest competitor, Baxter said, “Walmart saw visits down 2.5% in November, up 0.3% in December last year and down 3.1% in January 2022.” Baxter noted that this was a period of time which was heavily impacted by the Omicron variant. There were concerns that Omicron might disrupt the important holiday spending season for big-box retail names such as Walmart and Target. However, as you can see below, Target’s foot traffic data came in relatively strong.
Baxter wrote, “Target’s figures were even more impressive, with visits up 3.8% in November, 5.2% in December and 6.2% in January compared to those same months in 2019 and 2020.” She concluded her piece with a quote from Placer.ai reported which was bullish for the future of the industry as a whole; the research firm said, “The clear takeaway is that the two retail giants do not appear to be on any sort of direct collision course, and instead seem to be finding unique ways to complement each other for the wider consumer audience.”
On February 28th, right before Target’s March 1st report, Alanna Baker, a Nobias 5-star rated author published a quick note on the company, highlighting its fundamentals coming into the Q4 print. Baker wrote, “TGT opened at $199.22 on Monday. The company has a debt-to-equity ratio of 0.84, a quick ratio of 0.33 and a current ratio of 0.97. The stock has a market capitalization of $95.45 billion, a P/E ratio of 14.66, a P/E/G ratio of 1.15 and a beta of 1.00. The company’s 50-day simple moving average is $217.37 and its two-hundred day simple moving average is $236.29. Target Co. has a 52-week low of $166.82 and a 52-week high of $268.98.”
Also in late February, Daniel Schönberger, a Nobias 4-star rated author, published a bullish article on Target titled, “Target: Undervalued Again”. Daniel Schönberger was bullish on Target’s Q4 prospects coming into the recent quarter saying, “When looking at the quarterly results, growth is slowing down again – for revenue as well as operating income and earnings per share. But that is not a problem and should be expected. Target could report revenue growth of 20% or more for four consecutive quarters and almost double-digit revenue growth for seven consecutive quarters (in Q2/21, revenue grew 9.38%). These are phenomenal growth rates for a mature business like Target and we should not expect similar results anytime soon.”
Regarding the company’s likely growth slowdown, Schönberger wrote, “It should be obvious that Target will not report similar growth rates in 2022 and the years to come as it did in the quarters since the pandemic began. But it should also be obvious that Target does not have to grow at such high rates in order to be fairly valued and to be a good investment.”
Schönberger touched upon Target’s ongoing store-count expansion and remodel activity as a potential catalyst for Q4 and full-year 2021 growth. He wrote, “Target is continuing to open new stores, which will increase revenue. In the years 2013 till 2016, the number of total stores stagnated a little bit, but in the last few years the company is constantly increasing the number of stores, and in 2021 Target opened 29 new stores as well as 2 supply chain facilities (as reported during Q3/21 earnings). The company is also continuing to remodel its stores – 30 in 2021 and more than 100 stores will get remodeled in the coming quarters.”
Furthermore, Schönberger said that the company’s share buyback activity has the potential to continue to bolster its bottom-line, even in the face of rising capex related to store remodeling. He said, “In the last 15 years, Target decreased the number of outstanding shares about 3.7% annually from 865 million in 2007 to 489 million right now. To continue with a similar pace at current stock prices, Target must spend about $3.5 billion in share buybacks annually; and considering a free cash flow of almost $6 billion in the last four quarters and $1.7 to $1.8 billion necessary for dividends, it certainly would be possible for Target to spend this amount. But when being a bit more conservative, we can assume Target to buy back between 2% and 3% of its outstanding shares annually in the years to come.” And, buybacks aren’t the only shareholder returns that Target is known for.
This company has been very generous with its dividend over the years as well. Schönberger touched upon this saying, “The company will become a dividend king this year with 50 consecutive years of dividend increases. And after Target increased the dividend more than 30% last time, I would not be surprised to see another raise between 10% and 20%. Right now, Target has a payout ratio of 26% when taking the current quarterly dividend and TTM earnings per share and there is clearly room for Target to increase the dividend again (even if earnings per share should stagnate in the next few quarters).” Ultimately, he concludes, “When looking at the two simple valuation metrics – price-earnings ratio and price-free-cash-flow ratio – Target seems cheap again.”
Schönberger wrote, “At the time of writing, Target is trading for 14.5 times earnings and therefore below the 10-year average of 16.5. While looking at the P/FCF ratio, Target is trading at 16.5 times free cash flow (and above the 10-year average of 14.2), but these are rather low valuation multiples for a solid, recession-proof business that can grow at a solid pace.” What’s more, he said, “And not only the P/E ratio and P/FCF ratio are indicating that Target is undervalued. When using a discount cash flow calculation, Target also seems to be trading below its intrinsic value again.”
Using his discounted cash flow calculation, Schönberger wrote, “When calculating with these numbers (and assuming 10% discount rate as well as 489 million diluted outstanding shares), we get an intrinsic value of $243.56 for Target.” On 3/1/2022, when the company posted its quarterly results, the bullish takes of these authors were validated. The company beat consensus estimates on the bottom-line, posting Q4 non-GAAP earnings-per-share of $3.19 (which was $0.34/share above Wall Street’s target). The company reported that same-store-traffic was up by 8.1%. This figure was on top of the strong 6.5% growth that TGT posted in the fourth quarter of 2020.
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.
For the full-year, Target’s management said, “GAAP EPS from continuing operations of $14.10 was 63.1 percent higher than last year, while Adjusted EPS of $13.56 grew 44.0 percent compared with 2020. Both GAAP and Adjusted EPS have more than doubled since 2019.” And, regarding sales, Target reported that it, “Delivered $106 billion in total revenue, having grown nearly $28 billion, or more than 35 percent over the past two years.”
During the Q4 report, Target’s Chairman and CEO, Brian Cornell, said: "Our strong fourth-quarter performance capped off a year of record growth in 2021, reinforcing the durability of our business model and our confidence in long-term profitable growth. As we look ahead, we'll keep investing and delivering on all that has earned the loyalty and trust of our guests; that starts with our outstanding team and includes continued differentiation through affordability, assortment, ease and convenience."
Overall, when looking at the credible authors that Nobias tracks, we see that the vast majority of individuals publishing articles on this company agree with this bullish outlook. 94% of articles recently published by 4 and 5-star rated authors included a “Bullish” opinion of the company. And, when looking at the credible Wall Street analysts that our algorithm tracks (once again, focusing only on those individuals with 4 and 5-star ratings) we see that the average price target that is currently being attached to TGT shares is $265.25. Therefore, at today’s $224.10 price - even after the recent share price rally - Target appears to be undervalued. Relative to the $265.25 price target mentioned above, shares currently offer upside potential of approximately 18.4%.
Disclosure: Nicholas Ward has no position in any stocks mentioned in this article; however, Target is high on his watch list and he may initiate exposure in the near-term. 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.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.