Is TGT a good value play for the holidays?

December 7, 2018

Is TGT a good value play for the holidays?

The numbers from what has come to be accepted as the official beginning of the holiday are in. This year’s Black Friday and Cyber Monday sales figures hit all-time records despite an overall decrease in foot traffic at brick and mortar stores. Online sales on Black Friday actually began on Thanksgiving Day, and by the end of Friday had reached a nearly 24% increase over the previous year at $6.22 billion. Cyber Monday was even bigger, with a total of $7.9 billion. In all, the numbers seem to point to a healthy holiday shopping season.

The Consumer Discretionary sector, where most retailers, including Walmart (WMT), Target Stores (TGT), and Kohl’s (KSS) are categorized in the stock market, has been under pressure since early September; by mid-November, and just before the holiday shopping season kicked off, it has dropped almost 20%. The strong post-turkey day sales numbers have provided the sector a bit of a boost since then, and it has rebounded by almost 5%.

It is interesting that Target (TGT) hasn’t seen the same bump in its stock price; after gapping down before Thanksgiving from about $78 to about $69 overnight. As of yesterday’s close, the stock is down a little over 23% since the beginning of September. The question is, is that drop sign of bigger problems and increasing investor risk ahead, or does it present a legitimate value-oriented opportunity?



Fundamental and Value Profile

Target Corporation (Target) is a general merchandise retailer selling products through its stores and digital channels. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items. Its digital channels include a range of general merchandise, including a range of items found in its stores, along with an assortment, such as additional sizes and colors sold only online. Its owned brands include Archer Farms, Market Pantry, Sutton & Dodge, Art Class, Merona, Threshold, Ava & Viv, Pillowfort, Room Essentials, Wine Cube, Cat & Jack, Simply Balanced and Wondershop. Its exclusive brands include C9 by Champion, Hand Made Modern, Mossimo, DENIZEN from Levi’s, Nate Berkus for Target, Fieldcrest, Kid Made Modern, Genuine Kids from OshKosh and Liz Lange for Target. As of January 28, 2017, the Company had 1,802 stores across the United States, including 1,535 owned stores, 107 leased stores and 160 owned buildings on leased land. TGT’s current market cap is $36.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales have been impressive, with earnings increasing almost 20%, and sales growing about 7%. Earnings did decline over the last quarter by almost -26%, while revenues were mostly flat and increased only about .25%. The company’s margin profile dropped over the past quarter, with Net Income about 3.5% of Revenues compared to the 4.3% over the last year.
  • Free Cash Flow: TGT’s free cash flow is healthy at more than $2.7 billion. That translates to a Free Cash Flow Yield of 7.58%.
  • Debt to Equity: TGT has a debt/equity ratio of 1.10. This number is a little higher than I usually prefer, but the company’s balance sheet indicates operating profits are sufficient to service the debt they have. They also have good liquidity, with $825 million in cash and liquid assets and $10.1 billion in long-term debt.
  • Dividend: TGT pays an annual dividend of $2.56 per share, which translates to an annual yield that of about 3.69%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TGT is $21.23, and which translates to a Price/Book ratio of 3.27 at the stock’s current price. Their historical average Price/Book ratio is 3.43, which puts a long-term target price only a little above the stock’s current price at about $73 per share. The stock would have to drop to about $58 per share to offer a truly compelling value proposition, even with its more than 23% drop in price over the last three months.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The biggest portion of the stock’s decline has come since the beginning of November, as it dropped from a pivot high around $88 per share to a low at about $67 per share. After gapping down before Thanksgiving, the stock has established a fairly narrow consolidation range, with support at $67 and near-term resistance at around $72 per share. If the stock drops below $67, the next most likely support level would likely be in a range between $60 and $63 per share.
  • Near-term Keys: Without a compelling value proposition right now, the most interesting opportunities to work with TGT lie in the potential short-term trading opportunities it could offer. If the stock breaks above immediate resistance at $72, it should be able to fill at least half of the gap it created in mid-November, but could rally as high as $78 per share; that could be a very attractive opportunity to buy the stock or use call options. A drop below $67 would mark a drop below major support and would be a good signal to short the stock or buy put options.