Standing out among the Street's worst performers today is Target, a department store company whose shares slumped -3.5% to a price of $123.35, 19.28% below its average analyst target price of $152.82.
The average analyst rating for the stock is buy. TGT lagged the S&P 500 index by -3.0% so far today and by -31.0% over the last year, returning -23.0%.
Target Corporation operates as a general merchandise retailer in the United States. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Target's trailing 12 month P/E ratio is 16.9, based on its trailing EPS of $7.28. The company has a forward P/E ratio of 13.6 according to its forward EPS of $9.08 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Target's PEG ratio of 1.89 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Target's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 109,120,000 | 82,229,000 | 24.64 | -15.85 |
| 2022-01-31 | 106,005,000 | 74,963,000 | 29.28 | 0.03 |
| 2021-01-31 | 93,561,000 | 66,177,000 | 29.27 | -1.65 |
| 2020-01-31 | 78,112,000 | 54,864,000 | 29.76 | n/a |
- Average gross margin: 28.2 %
- Average gross margin growth rate: -4.6 %
- Coefficient of variability (lower numbers indicating more stability): 8.5 %
Target's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Target was $-1510000000.0 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, TGT is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of -32.1% and has on average been $3.88 Billion.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Target's P/B ratio is 4.75 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
Since it has a lower P/E ratio than its sector average, an elevated P/B ratio, and generally positive cash flows with a downwards trend, Target is likely overvalued at today's prices. The company has strong growth indicators because of an inflated PEG ratio and decent operating margins with a negative growth trend. We hope you enjoyed this overview of TGT's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
