Fundamental analysis of Target Corporation (TGT)

Fundamental analysis of Target Corporation (TGT), July 17, 2017

Update Target, August 28, 2017

Target is valued at 11.6 times 2016 earnings which is cheap enough to make it interesting. If we assume that the company will make $4.50 for the whole of 2017 – which is in line with the earnings reported so far – the P/E ratio comes in at 12.1. This number is not cheap, but not extremely expensive either.

The problem is of course that it is a retailer – a business model that is under heavy attack from e-commerce competitors. However, for the time being Target is making real money which potentially makes it an interesting value proposition.

Description:

Target Corporation operates a household retail business in the United States. It is based in Minneapolis, MN.

Valuation:

Given the strength of its business, the company is reasonably priced at 11.5 times earnings. Average earnings over the past three years are low with one year of loss. Price to forward earnings comes in at 11.8.

Price to book value is high at 2.9.

Income items:

The earnings history seems a little bit erratic with 2014 being a year with a loss. They actually lost $1.6 billion that year which equates to a loss of $2.56 per share. Hopefully, Target Corporation will stay away from those years in the future.

Balance sheet:

The company’s current liabilities are greater than its current assets so the net working capital is negative.

The Debt to equity ratio is 2.4, a number which usually is associated with high risk.

Free cash flow and dividends:

The company last year had a Free cash flow of $3.9 billion which equates to $6.70 per share. Of this they are paying out a dividend of $2.36 (2.8%).

Conclusion:

Because the company is reasonably priced, I’m tempted to dip my toes in the company. The only problem is the high debt levels.

Update Target, January 16, 2018:

Since we last visited Target the stock has advanced another 30 per cent. If I was tempted this summer, I’m no longer. By all means, if you already own the stock don’t get rid of it, but would I buy new stock at this point? No.

The reason for this is the same as last summer: Target has very high debt levels and a negative working capital. On the positive side the free cash flow yield is almost 9 per cent which means that they can afford the dividend of $2.46 this year. But in summary, the stock is too pricey for me.

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