Target Corp. is strong on profitability

Investment idea by DTI

Exchange: NYSE

Sector: Services

Industry: Discount, Variety Stores

Entry strategy

Price: $78,5—$82,50

Stop-loss: $74,33

Take profit: first target $90, then $101,50

Investment horizon: until the end of 2018

Company details

Target Corp. — an american offline and online retailer supplying a wide range of goods. The company owns 1802 selling points located in the United States. It sells products of world—known brands, such as, Mossimo, DENIZEN, Oh Joy! for Target, Genuine Kids and etc.

Target Corp. heavily invests in new business directions, especially in online trading. By the end of the year, the company will have invested $3 bln in the online—trading development, expansion of sales network and brand—recognition increase. Target Corp. finances shops renovation and keeps price low, which provides it with a high competitiveness level.

    We expect company’s financial performance and stock prices to improve due to:

  • investing in online trading and strong positions in the market of children’s goods, which will increase company’s cash flows;
  • management strategy of costs reduction and sales increase, which is expected to result in higher profitability level, and thus, net profit;
  • corporate tax rate decrease in the US, which will allow to decrease costs;
  • higher profits, and thus, increased dividend, which will push share prices up in the second half of 2018.

Company financial performance

On May 23, 2018 Target Corp. published financial results for Q1 of 2018. Sales rose above the forecasted level, however, due to increased investments in online trading, earnings per share (EPS) accounted for $1,32 compared to predicted $1,39.

Financial summary of Target Corp. performance is presented in Table 1 and Table 2

Table 1. Financial performance of Target Corp. ($TGT). Source: MarketWatch — Open original image
Table 2. Financial performance of Target Corp. ($TGT) for Q2—Q4 of 2017 and Q1—Q2 of 2018. Source: MarketWatch — Open original image

Target Corp. share price is lower than that of competitors. It is indicated by P/E multiplier value of 11,54, which is below an industry average of 24,37. Company value underestimation is also justified by P/BV and P/CF multiplier values.

The profitability level is higher than competitors’ one. For instance, Gross Margin and Operating Margin are amounted to 29,37% and 6,76%, respectively.

Return on assets (ROA) and investment (ROI) are higher than that of other firms in the industry. The values are 7,44% and 10,91%, respectively. Return on equity (ROE) is approximately twice as higher as competitors have (24,50% vs. 12,84%).

The assets management is more efficient than that other firms in the industry. It is indicated by the value of Asset Turnover, which equals 1,86 against an industry average of 0,70.

Target Corp. is inferior to competitors In terms of liquidity. Its Current Ratio accounts for 0,91 compared to 1,31 of similar companies. Interest Coverage is close to the average for the sector and is 4,86 against 5,02.

Technical analysis (trading plan)

Graph 1. Technical analysis of Target Corp. ($TGT) stock. Source: TradingView — Open original image