Should You Buy Target Stock? Yes, Its Problems Won’t Last Forever.

Target was forced to cut its guidance, not once, but twice, and a recent earnings miss added to the pain. What’s more, shoppers—no longer flush with cash and pressured by rising prices—are spending less on stuff and more on food, an area where Target lacks the scale of competitors such as

Walmart

(WMT).

But with Target’s shares down 29% in 2022, compared with the

S&P 500
index’s 18% decline, a lot of the bad news is already reflected in the price of Target stock. At the same time, there’s still a lot to like about the big retailer, from its growing market share to its ever-expanding dividend.

Yes, things have gone from bad to worse as Target aggressively discounts overstocked merchandise, but now its shares look like a bargain—but a bargain, it must be cautioned, best suited for investors comfortable with a bumpy road to redemption.

Target’s fiscal second-quarter earnings, which were released on Aug. 17, were disappointing. The company reported a profit of 39 cents a share, missing forecasts of 72 cents, but the bigger disappointment might have been that it wasn’t worse. Many investors “think [that Target] missed an opportunity to reset a lower bar,” says UBS analyst Michael Lasser, and instead will have to lower its guidance again in the near future. Analysts expect it to earn $8.16 this year, down from $13.56 in fiscal 2021.

Target’s results have been bad enough to make even some long-term investors in its shares a bit nervous.

Longtime Target owner Bill Smead, chief investment officer of Smead Capital Management, calls the Minneapolis-based retailer a “wonderful company with as sticky a customer base as there is.” He sees it in “the sweet spot” for the millions of millennials who are forming new households and families. Still, he thinks that it makes sense to buy Target on any dips that send it from a recent $165 back into a range around the $140s and $150s, and incrementally from there, depending on an investor’s time horizon and risk tolerance.

Everyone would like to wait for a better price, but those don’t always present themselves. And while the stock could fall further, buying it now might be the way to go.

“I think you’ve already seen the bottom in the stock, and 12 months from now, I think you have a better chance of this being up 20% than down another 20%,” says Max Wasserman, founder of Miramar Capital, which recently was adding to its Target holdings. He thinks the shares could be back above $200 next year: “That’s not a bold call. It’s growing earnings, and its dividend is great.” The stock yields 2.6%.

Wasserman is right about the earnings. Even at $8.16, Target is still making almost $2 a share more than it did in 2019, before Covid hit. Moreover, the retailer’s sales are setting records, its dividend has risen, and its returns on equity and assets—which climbed to 50.9% and 13.2%, respectively, last year—are meaningfully higher than they were in the prepandemic period.

Target’s market share expanded by $9 billion in 2020 alone, and with the store-traffic trend still positive and sales expected to climb 3.5% year over year, to a record $110 billion in fiscal 2022, Target continues to outpace the competition, including in downturn-resistant categories—such as food and beverage and essentials and beauty, whose sales were both up by double-digit percentages in the first quarter.

And while consensus estimates for this year and next have come down significantly in recent months, analysts still expect earnings per share to rebound more than 45% in fiscal 2023, which ends in January 2024, from this year’s lows, to $11.97. That would mark Target’s second-most profitable fiscal year ever, behind only fiscal 2021, during which it earned $13.56.

Of course, with worries about a slowing economy and persistently high inflation, investors aren’t sure those estimates won’t decline further.

Their fears might be overdone.

Wells Fargo analyst Edward Kelly, who recently upgraded Target to Overweight from Equal Weight, believes that the expectations for next year’s profits among buy-side analysts are about $11, below even the sell-side average close to $12. Kelly, however, thinks that Target can earn an above-consensus $12.70 in fiscal 2023, and he argues that this year’s margin issues are temporary. “Target has shown resilience in mild consumer recessions,” he writes. “Management is making the right decisions to address the challenges at retail,” boosting his confidence in Target’s “recovery potential.” His $195 price target is 18% above Friday’s close of $164.60.

But even at the consensus, Target shares look cheap, or at least cheaper than those of its closest competitors. Right now, they trade at 14.4 times expected 12-month forward earnings. That’s below the S&P 500’s projected 16.8 times and Target’s own 10-year average of 15.9 times. Target also changes hands at a 33% discount to Walmart’s 21.4 times, when historically the discount has been 15%.

While Walmart has had problems of its own, its larger amount of grocery sales have helped insulate it better from the inventory problems both companies have faced, and it has weathered past economic downturns well. At some point, the trend will reverse, and Target could be left looking like the more attractive of the two.

Target’s missteps won’t last forever. It’s time to start adding its shares to your shopping cart.

Write to Teresa Rivas at [email protected]