2023 has seen more than its share of economic and market-driven uncertainty, and that’s kept a lot of recognizable names trading near historical lows.
The truth about the economy, of course, is that it is subject to a lot of forces that have a relatively high degree of variability. These include global, macroeconomic considerations, as well as social and political influences. Most of the major threads that dictated market action and direction in 2022 are still very much in the forefront now. The war in Ukraine hasn’t abated, keeping geopolitical tensions high and pressuring commodity prices on everything from grains to energy products. Inflationary indicators remain elevated around the globe, prompting central banks to move in near-lockstep in raising interest rates on an aggressive basis. It took the recent shakeup in the banking industry to get central banks to begin talking about reconsidering the current hawkish tone currently in place.
The ripple effect of all of these various forces on the broad economy can interestingly be seen pretty clearly in the movement of some of the biggest, national retailers in the United States. For both (WMT) and Target Corp (TGT), for example, these companies enjoyed significant increases in their stock prices through 2021. As some of the inflationary pressures I just outlined began to be felt at the consumer level. In 2022, these stocks also began to come under increasing pressure. TGT, for example managed to hold around its late 2021 high in the $250 per share range through May of 2022 before rising costs and other pressures prompted investors to start dumping shares, pushing the stock to a yearly low in July of last year at around $137 per share. With the Fed’s latest rate increase, and other indications clearly showing that inflation is still high, TGT revisited its $137 low point in December, then briefly rallied to about $180 by the start of February. That rosy development has lost some of its luster, as the stock has spent the last eight week trailing back again, where it now sits at around $162 per share.
TGT is an interesting company that has managed to forge its own solid spot as a major national player in the retail industry even as competition among the biggest players in the space has greatly intensified. This is a company that, like WMT experienced healthy improvements in its bottom line in 2020 as they successfully navigated the health crisis, in part by being one of a small handful of “big box retailers” still standing after years of consolidation, and also by expanding the availability and use of the increasingly important omnichannel marketing and commerce strategies that put a big emphasis on online capability. Of course, given the stock’s latest price action, the question becomes whether those fundamentals are strong enough to translate to a useful value price for one of the most recognizable U.S. retailing names? Let’s try to find out.
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 $74.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined almost -41%, while sales increased by about 1.3%. In the last quarter, earnings increased by about 22.75% while revenues increased 18.4%. Like most stocks in this sector, the company operates with a narrow margin profile. As a percentage of Revenues, Net Income was 2.55% in the last year, and improved slightly to 2.79% in the last quarter.
Free Cash Flow: TGT’s free cash flow has declined sharply over the last year, falling into negative territory, at -$1.8 billion two quarters ago, and -$1.5 billion in the last quarter. A year ago, this number was about $2.15 billion. The decline is something that I read as a red flag that needs correcting to make the stock’s fundamentals more appealing.
Debt to Equity: TGT has a debt/equity ratio of 1.43. This is a higher number than I generally prefer to see, and implies the company is heavily leveraged. As of the last quarter, management reported with $2.2 billion in cash and liquid assets against about $16 billion in long-term debt. Cash has increased from about $1.1 billion a year ago, but debt increased by about $1.8 billion in the last quarter. It’s also worth noting that in mid-2021, cash was around $7.4 billion.
Dividend: TGT pays an annual dividend of $4.32 per share, which translates to an annual yield of about 2.7% at the stock’s current price. It’s also worth noting TGT’s dividend payout is a little more than 70% of their twelve-month earnings per share, which is a concern.
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 $76 per share. That means the stock is clearly, significantly overvalued, with -52.5% downside from its current price, and a practical discount price at around $61.
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 year. The red diagonal line plots the stock’s downward trend from its April high at around $255 to its low in July at around $137. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After consolidating at the low end of that trend through the end of 2022, the stock rallied to a temporary peak at around $182 to start February before the market’s broader, bearish momentum took over again, pushing the stock to its most recent pivot low at around $155 to mark current support. Immediate resistance is at around $164, with the stock approaching that level as of this writing. A push above $164 should find next resistance at around $173, where the stock peaked at multiple points from August of last year through February. A drop below $155 could see the stock drop to about $146 before finding next support, based on pivot lows that occurred in September and October of 2022.
Near-term Keys: Without a useful value proposition anywhere in sight (the stock’s realistic bargain value price is more than $100 below the stock’s current price), 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 $164, it could offer a useful signal to buy the stock or use call options, using $173 as an interesting exit target. A drop below $155 could be a good signal to short the stock or buy put options, using $146 as a practical bearish profit target.
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