Target Stock Just Barely Hits the Mark

darts-target-diversifyAs popular as this American retailer is, one may not guess that Target (NYSE:TGT) had lackluster sales last holiday season. But, with this morning’s earnings announcement, the tide may be changing for this company. Let’s take a look at Target and see whether it is still missing the earnings mark or if it has started to hit the bull’s-eye.

Company Overview

With roots that stretch back over a century, Target helped pioneer the concept of upscale discount retailing. Today, the company remains a big hit with younger and more trendy shoppers on more modest budgets. Based in Minneapolis, Target employs 365,000 across over just under 1,800 locations nationwide.The company is planning to expand into the Canadian retail market; Target plans to launch 135 stores across Canada in early 2013.

Earnings Buzz

Before the opening bell on Wednesday, Target reported solid sales and earnings growth that topped Street estimates. Compared with the same quarter last year, net earnings climbed from $689 million to $697 million; adjusted earnings per share jumped 11% to $1.11, which trumped the $1.01 consensus estimate by 10%.

Over the same period, total sales climbed 6% to $16.87 billion; analysts forecast $16.83 billion in sales so the company posted a modest sales surprise. For 2012, management expects adjusted earnings in the range of $4.60 to $4.80 per share. Shares of TGT opened up 2% after this earnings announcement.

Industry Breakdown

There are 19 companies in the Discount Variety Stores Industry; of those, Target is the fourth largest in terms of market cap. The company also stands out in terms of its 2.2% dividend yield, which is the second highest in the industry.

However, when it comes to sales growth, earnings growth, long-term growth rate and return on equity, this is a middle-of-the-road company. Target’s largest competitors are Costco (NASDAQ:COST) and Wal-Mart (NYSE:WMT). Of these three companies, Target has the second highest sales growth, the highest gross margin as well as the highest operating margin.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has fluctuated quite a bit over the past 12 months; this time last year, the stock was a D-rated sell. The company firmed up its fundamentals through October, then declined through the holiday months.

Nonetheless, over the past three months, buying pressure has improved, giving this stock a B for this Quantitative Grade. On the fundamentals side, there is still plenty of room for improvement, especially in terms of sales growth and the company’s track record of beating earnings estimates.

The one area of strength is Target’s return on equity. This stock receives a C for its Fundamental Grade and a B for its Total Grade.

Bottom Line: This stock is a “cautious buy.” The company’s solid earnings announcement should firm up its fundamental grade, but a decrease in buying pressure could still send this stock down into hold territory.

Recommendation: Cautious Buy

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