Target Corp.(TGT)
Investment Recommendation
Purchase price: $56.5
# of shares to purchase: 27
Stop-loss: $ 48
Take profit: $ 65
Pricing
Closing Price
52 Week High
$ 57.94 (11/10)
$ 60.34
52 Week Low
$ 44.70
Valuation
FY ( Jan.)
2003
2004
2005
July 2005-July 2006
Profitability(ttm)
ROA
ROE
Profit Margin
Operating Margin
Ya-hui Chang
ycmp4@mizzou.edu
Selection Criterion
The desired weigh of service industry in
our fund is 10% while the actual weigh is
only 2.21%. Thus I choose the stock from
the service industry. The criterion
includes solid financial conditions,
management, reasonable price, and
growing EPS.
Firm introduction
Target Corporation operates general
EPS
$1.76
$2.07
$2.71
$2.88
merchandise discount stores in the
United States. It offers an assortment of
general merchandise, including
consumables and commodities;
electronics, entertainment, sporting
goods, and toys; apparel and accessories;
and home furnishings and decor; as well
8.48%
18.18%
4.58%
8.29%
as a line of food items. The company
operates kits stores under Target and
ROE
SuperTarget brands. It also sells its
merchandise online, as well as offers
credit cards to its customers. In addition,
the company runs Target Clinics in select
twin cities Target stores, which offer
various services, including flu shots; and
treatment for common illnesses, such as
strep throat, bronchitis, and skin
Market Data (11/10/06)
Total Assets(July-2006) 35.4B
Market Cap
49.75
Avg. Vol (3mo.)
5,490,520
EPS (ttm)
$2.88
Trailing P/E
Forward P/E
Beta:
Target Corp.
20.09
16.28
1.02
conditions. As of August 31, 2006, Target
operated 1,444 stores in 47 states. The
company was incorporated in 1902 and is
headquartered in Minneapolis,
Minnesota.
Market and Competition
Target focuses not only on lower price, but also on the design and the services. Based
on the higher gross margin and the operation margin of Target, we can find that Target
provides higher quality/designed products to consumers and it has a good cost control
and management compared with its competitors.
In the price, Target has higher P/E ratio than its competitors, but it has lower PEG
ratio. We can see Target has higher growing opportunity than others.
DIRECT COMPETITOR COMPARISON:
TGT
COST
Market Cap:
49.12B
24.53B
Employees:
338,000
Qtrly Rev Growth (yoy):
11.30% 19.00%
Revenue (ttm):
55.36B
Gross Margin (ttm):
Pvt1
WMT
Industry
N/A
197.99B
2.22B
N/A 133,0001
1,800,000
11.40K
N/A
11.30%
9.60%
60.15B
19.09B2
329.86B
4.53B
32.37% 12.31%
N/A
23.22%
28.33%
EBITDA (ttm):
6.00B
2.08B
N/A
24.45B
305.85M
Oper Margins (ttm):
8.29%
2.71%
N/A
5.87%
2.94%
Net Income (ttm):
2.54B
1.10B
1.11B1
11.51B
48.15M
EPS (ttm):
2.884
2.297
N/A
2.557
1.30
P/E (ttm):
19.83
22.82
N/A
18.57
18.59
PEG (5 yr expected):
1.05
1.49
N/A
1.13
1.29
P/S (ttm):
0.87
0.40
N/A
0.60
0.58
COST = Costco Wholesale Corp.
Pvt1 = Kmart Corporation (subsidiary or division)
WMT = Wal-Mart Stores Inc.
Industry = Discount, Variety Stores
Nov. 8th, 2006. From Yahoo Finance
Price performance
In the long term (5 years), we can see the performance of Target has been better than
those of S&P 500 and WalMart. However, the price performed weakly in the past year,
especially from 2005 Q4 to 2006 Q2. (One possible reason is that the growing in 2006 is
slower.) Since August 2006, Target performs very well. One reason is the good
expectation of future sales, and another may be the underestimated price in the past.
3 Months
1 Year
5 Years
Financial Analysis
Profit/Cost Structure:
Target has a stable cost structure, where the COCS and SG&A account for around
87-88% of the total revenue. Interest expense is pretty low. The EBIT and EPS are
growing. The cash dividend, which accounts for 14-16% of EPS, is growing.
2006Jan-July
Revenue
2005Jan-July
2005
2004
2003
100%
100%
100%
100%
100%
COCS
65.47%
65.55%
66.38%
67.13%
67.55%
SG&A.
22.38%
21.96%
21.26%
20.92%
20.6%
Interest exp.
1.03%
0.9%
0.88%
1.2%
1.3%
EBIT
7.17%
7.09%
7.3%
6.47%
6.19%
Diluted EPS
$1.33
$1.16
$2.71
$2.07
$1.76
Cash dividend
$0.22
$0.18
$0.38
$0.31
$0.27
Growth Trend:
Target performs very well in FY2005 (Jan.29, 2005- Jan 28, 2006). The growing is slower
in 2006. Target has a weaker sale in October, but it offered a forecast that its same-store
sales will jump 4% to 7% in November. General expected growth rate for the next year is
15%. (from Yahoo Finance)
2006 Q1-Q2
2005
Five-year Compound
Annual Growth rate
11.69%
12.3%
12.1%
EBIT
12.9%
20.1%
16.9%
EPS
14.53%
31.0%
20.7%
Revenue
B/S:
The capital expenditures are growing since 2005 January. The long term debt/equity is
stable. It seems that the quick ratio and current ratio are low, but compared with the
competitor, WalMart, they are higher. (The current ratio in Jan 2006 of WalMart is 0.89.
Because the industry is receiving cash everyday, the low current ratio can not be a big
problem.
2006 July
2006 Jan
2005 Jan
35,423M
34,995M
32,293M
Capital expenditures
1,899M(Half year)
3,388M
3,068M
L-term Debt/ Equity
0.65
0.64
0.69
Quick ratio
0.76
0.89
1.03
1.4
1.5
1.69
Total Asset
Current ratio
Valuation:
Two stage dividend discount model:
Based on the information below: the Beta of Target is 1.02 (from Yahoo Finance), the
expected S&P 500 return is 8.5%, and the interest rate of 10 years bond is 4.59%, I
calculate the discounted rate of Target: 4.59% + 1.02 * ( 8.5% - 4.59%) = 8.58%.
I expect the growth rate for the high growth phase is 15% (based on 2006 EPS growth
rate), and the period of high growth phase is 3 years. The growth rate for staple stage is
6%. The payout ratio in high growth stage is 14.58% (the current dividend policy of
Target) while the payout ratio in the stable stage is 45% (the same as WalMart).
The result:
Value of assets in place =
$4.90
Value of stable growth =
$12.37
Value of extraordinary growth =
$47.46
Value of the stock =
$64.72
Relative model:
a. P/E ratio
The P/E ratio in the industry is 18.59 (from Yahoo Finance), and the EPS of Target (July
2005-July 2006) is $ 2.88. Using the P/E ratio model, the price should be $53.54 (18.59
times 2.88). The current price is $ 57.94(11/10/2006).
b. PEG ratio
The expected growth rate (from Yahoo Finance) is 18.89%. The PEG ratio in the industry
is 1.29. The price should be $70.18 (18.89 * 1.29 * 2.88). It is higher than the current
price.
Because Target has higher expected growth rate than its competitors, it deserves higher
price and P/E ratio. I think the price from PEG ratio is more reasonable.
Analyst opinion
The mean target is $63.73, and the median target is $64, which is similar to the value
from Dividend Discount Value. The consensus recommendation from CNN Money is
“Overweight”.
PRICE TARGET SUMMARY
Mean Target:
63.73
Median Target:
64.00
High Target:
70.00
Low Target:
55.00
No. of Brokers:
15
Yahoo Finance
1.0 - 1.24: Buy
1.25 - 1.74: Overweight
1.75 - 2.24: Hold
2.25 - 2.74: Underweight
2.75 - 3.0: Sell
Consensus Recommendations
Current Mean
1.4
Number of Brokers
15
Industry Mean
7-Days Ago Mean
1.4
30-Days Ago Mean
1.3
60-Days Ago Mean
1.4
90-Days Ago Mean
1.5
Sector Mean
WSJ/DJ US Mean
1.62
CNN Money
News
As the holiday session is coming soon, the retailers forecast the sales would grow.
“In the wake of October's results, most analysts took down earnings estimates on
Wal-Mart, but raised those on Target.”
“On Friday, retail watchers were expecting Wal-Mart to deliver a per-share profit of
60 cents, down from an average of 62 cents a share, according to results culled from
analysts reporting to Thomson First Call. They're projecting total sales at $84.48
billion, a near-11% increase over the year-ago period. “
“At Target, the average had crept up a penny to 55 cents a share. Total sales were
forecast at $13.58 billion, up 11% over last year.”
"Our outlook remains favorable for Target, and we believe sale momentum remains
healthy as we enter the holiday season," Lehman Brothers analyst Robert Drbul wrote
in a preview note.
By Jennifer Waters, MarketWatch
Economy and the risk
The sales of retailers are affected by the economic situation significantly. We can use the
Consumer Confidence Index to predict the sales in the Christmas holiday session. In
October, CCI is slightly lower that CCI in September. The economy in USA may grow
slower, and it is one risk for Target.
Another risk is the interest rate. Because Target has its own credit card business, which is
floating-rate, the fluctuation in the interest rate will increase the exposure of the interest
rate risk. On the other hand, the interest rate has a huge impact on the whole economy,
which affects the CCI and the sales of Target. As well as the interest rate, the inflation rate
is another consideration for the whole economy. Unfortunately, both are uncertain now.
The last one is the competitive industry. To increase the sales in the holiday selling
session, Target’s main competitors, WalMart, will have some promotions to stimulate the
sales.
Conclusion
Pros
Cons
Solid financial conditions
Growth opportunity
Higher margin
Good cost control and management
Uncertain economy
Competitive industry
Favorable opinions from analysts
Recommendation
I suggest purchasing 27 shares of Target when the price is below $56.5. The amount of
the total assets of the fund is $78,193.79. The desired weigh of service industry is 10%
while the actual weigh is only 2.21%. Thus I recommend that the weigh of Target is 2%.
Hence the number of shares to purchase is 27. Based on the value from DDM and other
analysts’ opinion, I take $64 as the target price to take profit.
Reference:
http://www.conference-board.org/
Yahoo Finance
CNN Money
Wall Street Journal
2005 annual report of Target
2006 Q2 report of Target