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TGT is down almost -24% this year, but it still isn’t a good bargain

The early part of this week has been punctuated, if not by optimism, than at least by an increasing sense of hope that the U.S. might be reaching a peak in the spread of COVID-19 infection. If that is true, then it also makes sense that there is a light at the end of the tunnel that has become extended self-isolation and a near-complete shutdown of all but the most essential business activities. That hope seems to be giving investors reason to start being a little more bullish; after pushing major market indices down about -35% in about a month, the S&P 500 has managed to rebound about 20% from the low, and about 10% in just the last week.

That optimism seems to have extended to big-box retailers like WalMart Inc. (WMT) and Target Corp (TGT), to name just a couple of major names. The fear for a lot of companies in the Retail industry of Consumer Discretionary sector is that the extended shutdown of the economy to limit the spread of coronavirus will have such a dramatic effect that smaller businesses won’t survive. Exactly how accurate that statement will be remains to be seen; but as is generally true for any kind of significant economic drawdown, the best long-term investing opportunities usually lie with the larger, more established names that boast balance sheets that are strong enough to weather those kinds of economic difficulties. WMT is certainly one of the first names that the average investor would think about, but what about TGT?

TGT is an interesting company, that has managed to forge its own solid spot in the retail industry even as competition in the space has greatly intensified. The market recognized the company’s strengths in a big way in 2019, pushing the stock from around $60 in January 2019 to about $130 by end of December. From that high point, broad market uncertainty, first about the sustainability of economic growth in the U.S., and then buffeted by the reality of COVID-19 the stock has dropped back by about -24%. This week the stock appears to be stabilizing, and may even be building some bullish momentum along with the rest of the market. Has the stock dropped far enough to make it a good value opportunity? Let’s dive in. 

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 $49.6 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and sales have increased, with earnings increasing a little over 10%, and sales growing about 2%. In the last quarter, earnings grew more than 24% while revenues increased more than 25%. Like most stocks in this sector, the company operates with a narrow margin profile. As a percentage of Revenues, Net Income was 4.2% in the last year, and narrowed somewhat to 3.56% in the last quarter.

Free Cash Flow: TGT’s free cash flow is healthy, and growing at more than $4.15 billion. A year ago, this number was about $2.57 billion. It’s current number translates to a Free Cash Flow Yield of 8.4%.

Debt to Equity: TGT has a debt/equity ratio of 1.15. 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 $2.5 billion in cash and liquid assets and $13.6 billion in long-term debt.

Dividend: TGT pays an annual dividend of $2.64 per share, which translates to an annual yield that of about 2.71%.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $83 per share. That means the stock is clearly overvalued, with -17 downside from its current price.

Technical Profile

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

Current Price Action/Trends and Pivots: The chart above displays TGT’s price action over the last two years. The red diagonal line plots the stock’s long-term upward trend through 2019, and also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock’s drop this year pushed it down to around the 50% Fibonacci retracement line, with immediate support between $92 and $95. The stock is currently showing some bullish momentum, and has near-term resistance at around $103 per share. A break above that point could give the stock short-term momentum to push to between $108 and $114 per share. A drop below $92 could see the stock test next support at around $87, marked by the 61.8% retracement line, and punctuated by strong resistance at that level at multiple points in 2018 and 2019.

Near-term Keys: Without a compelling value proposition right now (the stock’s realistic bargain value price is around $66), 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 $103, it could offer a useful signal to buy the stock or use call options using $108 as a practical exit target. A drop below $92 would mark a drop below major support and would be a good signal to short the stock or buy put options, using $87 a bearish profit target.

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