TGT Stock Is Sliding Into Value Territory

by Ethan Roberts | January 24, 2014 1:43 pm

Target (TGT[1]) has been all over the news in the past few months, as a breach in the retailer’s security led to the hacking of information for 110 million credit card holders between Nov. 27 and Dec. 15, which in turn has haunted TGT stock.

As you can see from the chart below, TGT stock has fallen about 12% since the news, falling from a recent high of 67 to a 52 week low Thursday of 58.26, before rebounding to finish at $58.65. Most recently, Cowen and Co. downgraded TGT stock[2] from “market perform” to “underperform” and slashed its target price (no pun intended) from $66 to $47 — at the time, a 20%-plus discount to Target’s stock price.

012414TGT TGT Stock Is Sliding Into Value Territory

One of the main fears is that a loss of confidence among Target’s customers could cause sales to further decline, adding to a weaker bottom line for TGT.

In addition, analysts are now speculating that Target might have to suspend its share buyback program[3] to meet new costs from the data breach. Up to 40 million credit cards might need to be replaced, and about 50,000 point-of-sale systems at cash registers could also need replaced. also need replacement.

However, Target is denying that it will discontinue its buyback program. Target spokesman Eric Hauseman said:

“We remain committed to share repurchase over time and have consistently maintained that we will govern the pace of repurchases with the goal of maintaining our strong A credit rating.”

He also said Target’s approach to providing dividends for TGT stock hasn’t changed. Target has raised its dividend consistently since the 1970s.

To counteract the bad publicity generated by the news, Target has been aggressively marketing itself with daily news briefings and statements. TGT recently offered free credit monitoring services to customers for whom they have an e-mail address, and gave 10% off on all sales over an entire weekend.

And Still, There’s a Bullish Case for TGT Stock

Every great professional athlete — whether it’s a Michael Jordan, Tiger Woods or Wayne Gretzky — has an occasional slump or injury that prevents them from performing at their usual capacity. One of the traits that distinguish the great ones from the rest is their ability to bounce back from adversity and excel once again.

The same is true for great companies and their stocks. Many of the biggest stars of the corporate world have seen their stocks temporarily crumble for one reason or another over time. For instance, in 2010 we saw Toyota Motors (TM[4]) crushed from $92 to $67 per share after faulty accelerator pedals triggered a massive recall. Yet four years later, TM stock has almost doubled to $120 a share.

Investors who take advantage of opportunities such as that one usually are rewarded with huge long-term gains, and I see no reason why TGT stock won’t fall into the same category over time.

TGT stock currently sports a modest 15 P/E, and its recent share-price suffering has driven the dividend yield to nearly 3%. And while Target’s recent decision to stop providing health insurance to about 35,000 part-time workers[5] might not make it popular with employees, it will be a huge cost-cutting measure, which will support the stock price.

In addition, Target, which already cut 700 unfilled positions over the past six months, has just announced that they will be laying off an additional 475 workers[6], with most of those employed at their Minneapolis headquarters.

The most important thing for investors is to not rush in and grab shares just yet. It is possible that we will see more analyst downgrades on TGT stock, or more bad news, and Target does have an earnings report coming out on Feb. 26. The bad publicity broke right before Christmas, and Target has already stated that holiday sales were adversely affected.

However, after February — and especially if the earnings report is negative — I see TGT stock as providing investors with a solid long-term play, especially with that dividend yield now near 3%. Consumers’ memories aren’t very long, and in time — just like with Toyota — most of Target’s consumer base should regain confidence in the company’s stores. Don’t expect a long-term migration toward Walmart (WMT[7]) just because of this.

There is recent support for TGT stock at $57.50, and below that around $55. However, if the earnings report is much worse than expected, the Cowen target price of $47 is entirely possible. On the upside, that would return Target stock to a much stronger support level from two years ago.

So investors should make a note on their calendars to revisit TGT stock, and look to possibly grab shares at the beginning of March. If they do, I believe they will be amply rewarded for their patience for a long time to come.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Endnotes:
  1. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  2. Cowen and Co. downgraded TGT stock: http://www.businessweek.com/ap/2014-01-21/ahead-of-the-bell-target-downgraded
  3. Target might have to suspend its share buyback program: http://blogs.marketwatch.com/behindthestorefront/2014/01/21/targets-data-breach-may-force-it-to-halt-buybacks-analyst/
  4. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM
  5. stop providing health insurance to about 35,000 part-time workers: http://www.forbes.com/sites/clareoconnor/2014/01/22/target-joins-home-depot-walmart-others-in-dropping-health-care-for-part-timers-citing-obamacare/
  6. just announced that they will be laying off an additional 475 workers: http://investorplace.com/2014/01/target-layoffs-job-cuts-will/#.UuEr0RAo7IU
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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