Target, Taking The Bull By The Horns
When Target (NYSE: TGT) warned the market its Q2 earnings could fall short it was dire news for the market. The idea that inventories were bloating, sales were slowing, and a new era of discounting is upon us can only mean one thing; tighter margins. The caveat, however, is that Target also maintained its back-half outlook which suggests a buy-the-dip opportunity is upon us and we think it could be a good one. Not only is there a chance for Target to outperform the now deteriorated outlook but the stock is offering a value and yield we think too good to pass up.
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“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” CEO Brian Cornell said in a televised interview.
Don’t forget, this is Target we’re talking about, one of the leading winners of the pandemic. The company may be experiencing a headwind now but the long-term outlook is still very bullish. The company is expected to grow at a mid-single-digit pace for the next 2-3 years at least, earnings growth should outpace revenue growth, and dividend growth is also in the forecast. Target is a Dividend King with 54 years of consecutive increases to its credit and we are certain it could continue raising the payment for another couple of decades. The payout ratio is a very small 28% of the earnings which leaves plenty of room for increases. Trading at only 16X its earnings, the 3.0% yield it’s paying is very attractive.
The Analysts Lower Their Target For Target, But It’s Still A Buy
Target has had nothing but negative coverage since the first of the year and a total of 22 price target reductions since the Q1 earnings were released. Fourteen of the price target reductions came in the wake of the profit warning but you need to take this information with a grain of salt. While the price target is falling the analysts still rate the stock a solid buy and see a high-double-digit gain relative to the current price action.
The stock has gotten two downgrades from Buy to Neutral-equivalents over the past 90 days but not enough to budge the consensus rating which has been a firm Buy for at least the last 12 months. The salient point is the current Marketbeat.com consensus is still more than 40% above the price action and we see a floor in the revisions. Target’s warning was a preemptive move that we think is overly cautious and one that has the stock set up for a rebound now.
Looking at the institutional activity, we think the institutions are still on board with Target. The total of activity subsided from Q1 and the net turned bearish but only slightly so which we find telling given the profit warnings. In our view, the institutions are rotating into and out of the name with some trimming and some adding.
The Sell-Off In Target Is Overextended
The sell-off in Target following the Q1 miss and subsequent profit warning has been sharp but there are several indications the move is overextended and ready for a rebound. Not only is the stock oversold at these levels but the MACD is noticeably divergent from the new low and indicates buying at the current price level. While there is a possibility Target will continue to move lower in the near term, the longer-term outlook suggests a return to the mean if not a full reversal for the stock. In this light, we think Target could move back up to the short-term moving average fairly soon and then move sideways into the Q2 report which is due out in mid-August. By then, we should know if the rebound is just a relief rally or if it’s one that will stick.