Target (TGT)

Hey guys, so Target just recently adjusted its fourth quarter guidance and it seemed to really have taken a toll on the stock price. Their earnings are now expected to come out to $1.45 to $1.55 per share, down from $1.55 to $1.75. For the whole year, earnings are now expected to be $4.57 to $4.67, compared to the $4.67 to $4.87 outlook given a few months ago. It's currently trading around $64 and I'm thinking there might be some value to be had here. Here are roughly, some of their current metrics:

P: $64 (currently)
EPS TTM: 5.54
P/E: 11.5
Eearnings Yield: .086 (8.6%)
P/B: 3.25
P/S: 0.5
EV/EBITDA: 6.34
FCF/Share: 5.70
FCF Yield: .089 (8.9%)
ROA: 8%
ROE: 27%
ROIC: 14%

They're currently at a 52 week low after releasing their adjusted guidance and I'm thinking the massive sell off was an over reaction. Throughout 2016 they had a $10 billion dollar share repurchase program and used $9.4 billion buying back their stock at an average price of $70.50 showing that management did a good job of buying their stock back throughout the year at its lower end of their price range, giving me some confidence in their management. For 2017 management has been authorized to use another $5 billion on share repurchases, which if they average the same buyback price at $70 that would reduce their outstanding shares by 715 million shares. Over the past 11 years they've growth their Free Cash Flow at an average rate of 24% and over the past 5 years it's grown by an average rate of about 35%. Target also has a great dividend history and has a 5-year dividend growth rate of 20% an 11-year growth rate of 38%. Their current dividend and yield are $2.40 and 3.77% and they plan to continue increasing their dividend.

Some other points of interest are how they have had a lot of insiders buying up the stock in January after the drop and recently filed a 13G filing on January 27th in which Blackrock increased their holdings of TGT from 3.82% of the outstanding shares up to 6.8% of the outstanding shares. Showing a lot of insiders and institutions buying up TGT stock after this massive drop in price.

I ran the stock through the Buffett Books DCF calculator with the following conservative metrics. FCF of 3,393 ; FCF annual growth rate of 3% ; 10 years ; 10% discount rate ; 1% perpetuity growth rate ; 595 outstanding shares ; and current trading price of $64. Giving me an intrinsic value of $71 and an 11% possible return. Considering the companies $5 billion share repurchase program (715 million shares at their average buyback price of $70) and that their free cash flow growth rate is much higher than the 3% I used I think the intrinsic value is higher than what the DCF calculated. Now those are a lot of pros I found with the stock but here are some cons.

They have had declining sales for the past few years which is due to the increase of online shopping however their online sales have been increasing at a rate greater than their competitors and at the same rate their in store sales have decreased. I feel this is a huge area of threat for the stock with the rise of Amazon and what Amazon is looking to do with starting to sell groceries. If Target can't increase their online sales at the same ofrbetter rate that their in store sales are decreasing this could be a big problem for the company and investors. They also have a debt/equity of 1.09 and financial leverage of 3.49 which is higher than I would say most value investors like.

If anyone has any feedback or thoughts on Target it would be great to hear what the community has to say, or if I messed up any of my math please correct me! Thanks!

Comments

  • I own target. I think target is a good pick. Can you imagine a world without target? I think they are making a good direction into online sales. I think they will sustain the markets.
  • I valued the company this evening as a mature company in growth. I used in between 2.1 to 2.5 as my growth rate as the growth of the economy.

    Their buyback program is the deal breaker for me it increases their value in a huge way. I valued the stock at $80.4529 using my estimated LT growth of the economy of 2.3%. I could see the fair value as low as 75 and as high as 83 ish. When looking at their SO Cash Flows they are returning well over 80% of operating cash flow back to the shareholders. On top of a 4% dividend yield this seems like a no brainer.

    Considering their buyback/ dividend yield this seems like a strong choice at the moment.
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