Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

TGT Stock Study (4-19-23)

Posted by on May 12, 2023 at 06:54 | Last modified: April 19, 2023 14:56

I recently did a stock study on Target Corp. (TGT) with a closing price of $162.40.

CFRA writes:

     > Incorporated in 1902 and headquartered in Minneapolis, Target
     > Corporation is one of the largest retailers in the U.S. As of
     > January 29, 2022, the company operated 1,926 Target locations
     > in the U.S. with 243.3 million square feet of floor space, up
     > from 1,897 stores with 241.6 million square feet of floor
     > space twelve months earlier. Target currently has stores in
     > all 50 states and the District of Columbia. Its stores
     > generally cater to middle- and upper-income consumers,
     > carrying a broad assortment of fashion apparel, electronics,
     > home furnishings, household products, and other general
     > merchandise. Target.com offers a more extensive selection of
     > merchandise than the company’s physical stores, including
     > exclusive online products.

This mega-sized company (revenue > $50B) has grown sales and earnings at annualized rates of 4.9% and 11.9% over the last 10 years, respectively. Lines are mostly up except for dips in sales (’16) and EPS (’16 and ’22). PTPM led peer and industry averages throughout the decade despite a horrible ’22 contributing to a last-5-year average of 5.5%.

ROE also led peer and industry averages over the last 10 years, increasing from 12.0% (’13) to 25.0% in ’22 and posting a last 5-year average of 31.9%. Debt-to-Capital was higher than industry averages, increasing from 45.9% (’13) to 62.9% (’22) with a last-5-year average of 55.7%. Quick Ratio is chronically low (0.20 in the last quarter), but Interest Coverage is 8.2. Value Line gives a B++ rating for Financial Strength while M* assigns an Exemplary rating for Capital Allocation.

With regard to the EPS dip [crash: down 57.6% YOY] in ’22, Value Line writes:

     > Followers of this story will recall that the bottom line last year
     > was torpedoed when management announced a serious inventory
     > bloat would be worked down by across-the-board discounting.
     > Shortly thereafter, a clearance run event was held to get
     > shoppers to spend at the tail end of the holiday season, thus
     > again clearing inventory space for items geared toward warmer
     > weather. The end result was a sharp drop in profitability and
     > a full-year earnings figure of just $5.98 a share.

I forecast 2% long-term annualized sales growth based on the following:

I am forecasting conservatively.

I forecast 14% long-term annualized EPS growth based on the following:

I am suspicious when I see a big YOY change accompanied by diametrically-opposed estimates like we have here. The opposing long-term estimates are d4.9% (“d” signifies a negative number) and d7.5% vs. 25.1% and 14.9%. I assume the time frames to be identical, but what if they’re not?

Value Line illustrates this clearly. Year-by-year EPS for TGT is $13.56 in ’21 (actual), $5.98 in ’22 (actual), $8.50 in ’23 (projected), and $10.60 in ’24 (projected). A 2-year projected growth rate is either d33.6% or 33.1% depending on whether I start from ’21 or ’22. Both numbers are “projected” since the 2-year interval carries into the future.

Since Target’s fiscal year ends in January, I must be clear on how the different data sources are labeling in order to ensure valid comparisons. Zacks and Nasdaq.com label “current year” as 1/24. MarketWatch says “TGT will report 2024 earnings on 02/28/2023,” which is complete nonsense [should be 2022 not 2024], and lists ’23 as the first year of data without stating whether that is actual or projected. CNN Business labels ’23 and ’24 with “analyst forecast” and ’22 with “reported earnings.” Furthermore, with CNN Business and MarketWatch both reporting FactSet data and the latter’s ’25 number equal to the former’s ’24, I can apply deduction to clarify. CFRA labels ’24 and beyond as “estimated” and indicates Jan as FY end [as an aside, based on the CFRA quarterly EPS matrix with the full year summed in the rightmost column, the 3-year projected CAGR must go from $13.56 in ’22 to $11.48 in ’25 to get d5.4% or d5% rounded. This is one year of historical data and two years projected, which makes “3-year projected CAGR” somewhat of a misnomer]. Value Line includes a footnote stating “Fiscal year ends Sat. nearest Jan. 31st of following cal. year.” This announces the FY ending in ’23 will be labeled as ’22 (the bold font is also helpful to indicate projected versus actual data).

Unfortunately, YF and Seeking Alpha do not specify the long-term projection interval. I would normally assume this, but with two alarmingly negative estimates I want to be sure. Seeing MarketWatch and Nasdaq.com project significant gains one, two, and three years ahead along with Value Line’s $18.30 projection for ’26-’28, it seems nearly impossible for YF and Seeking Alpha to have negative long-term estimates unless they have indeed slid the time interval back one year to begin with $13.56. This would be in error with the next completed FY available, but I cannot prove it.

What I therefore have are six long-term estimates with a mean of 6.9% per year [13.4% with the negative estimates excluded]. I am nearly cutting that in half [4%] due to the uncertainty, and I absolutely do not feel comfortable with my common practice of forecasting below the range since I feel something is amiss.

So why did I enter 14% EPS growth when I am actually forecasting 4%?

My Forecast High P/E is 16. Over the last 10 years, high P/E has ranged from 14.8 (’17) to 42.6 (upside outlier in ’22) with a last-5-year average (excluding the outlier) of 19.8. I am forecasting near the bottom of the range (only ’17 is lower).

Since data sources are clear in projecting a rebound over the next couple years, I am overriding projection from the last annual EPS ($5.98/share) to the trendline ($9.52/share). Failure to do this would result in a projected high future price less than the current stock price [INVALID]. The override results in $11.58/share and is roughly equivalent ($11.51/share) to projecting from the last annual EPS with a 14% per year growth rate. In an attempt to be consistent with other stock studies, I am substituting the latter.

My Forecast Low P/E is 11. Over the last 10 years, low P/E has ranged from 9.1 (’17) to 22.9 (’22). Low P/E has been lower than 14.2 in every year since ’14, which makes the 22.9 somewhat of an upside outlier. Excluding that, the last-5-year average is 11.0.

I cannot leave the TTM EPS default as the projection point since it exceeds the high EPS. I will override to the $9.52 trendline, which basically implies zero growth over the next five years.

My Low Stock Price Forecast (LSPF) is the default value of $104.70. This is 35.5% less than the previous close and 23.7% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 22.4% (’21) to 66.2% (’22). The last-5-year average is 41.3%. I am forecasting conservatively at 25.0%.

These inputs land TGT in the HOLD zone with an U/D ratio of 0.4. Total Annualized Return (TAR) is 4.1%.

PAR (using Forecast Average—not High—P/E) is 1.0%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 4.1% instead. Even that, though, is far less than I seek for a large-size company.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 146 studies done in the past 90 days (my study along with 87 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.3%, 7.1%, 18.5, 11.0, and 40.6%. I am lower on projected sales growth and Payout Ratio. My Forecast Low P/E is equal and my Forecast High P/E is lower.

Other MS studies may or may not have applied the manual override, which I did in conjunction with the 14% projected EPS growth. MS high and low EPS [can help to clarify this and] are $9.18/share and $7.22/share compared to my $11.51 and $9.52. Even if my P/E range is a bit lower, my EPS range is higher thereby nullifying any MOS this study may have had.

MS LSPF of $86.50 (17.4% lower than mine) is about 10% higher than the default $7.22 * 11.0 = $79.42 and implies a Forecast Low P/E of 12.0.

TGT strikes me as somewhat of a mess right now! I would await prices under $124/share to re-evaluate. As time passes and we get a better picture of the company’s recovery, hopefully more certainty will resurface as well.

Categories: BetterInvesting | Comments (0) | Permalink