Why You Should Leave Target Corporation Stock Off Your Shopping List

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TGT stock - Why You Should Leave Target Corporation Stock Off Your Shopping List

Even on Black Friday, there’s no reason to be excited about Target Corporation (NYSE:TGT). Yes, you can be excited by the products it offers and very competitive prices. I have a store nearby and am in there quite a bit, because it is convenient and the prices are pretty darn good. That’s not a positive for TGT stock.

Why? When prices are pretty darn good, that’s a good indication that margins aren’t great. Given that Target said that price wars would be a main fixture of its near-term strategy, that would make me, as an investor, nervous.

Yes, TGT’s third fiscal quarter seemed pretty good on the surface, but when you dig into the actual results, you realize that the numbers are actually rather depressing. If you read my column you know that comparable stores sales are the most important metric I examine. It determines if there is increasing traffic and/or if the retailer has pricing power.

TGT’s Falling Comps

If comps are above 5%, that’s fantastic. Home Depot Inc (NYSE:HD) has been on fire in that regard. If comps are 3-5%, that’s just fine. It shows modest growth and is perfectly acceptable. If comps are below 3%, then it shows the business is probably just holding its own. The growth is nice, but it better be coming all from increased traffic to impress me. Of course, if comps are declining, that’s a disaster.

Target came in with comp traffic of 1.4% and comp sales of 0.9%. Meh. Not surprisingly, then, total revenues only rose 1.4%, and that was met with a 1.5% increase in cost of sales. So gross margins did improve by $50 million, or 1%. Alas, SG&A increased by $173 million, or 5%. That ended up on the bottom line, so operating income fell 18% from $1.06 billion to $869 million.

I see no way of spinning this into good news. Add in another $112 million in added interest from higher debt, and net income finished at $480 million, down 21% from $608 million.

This is not growth. TGT stock is not in great shape with these numbers.

However, TGT stock is also not at death’s door. A profit is still a profit. Nine months into the year, and TGT stock has enjoyed $1.83 billion in profit. I won’t complain about that at all.

 

The other thing I won’t complain about, and in fact will applaud, is TGT stock has great cash flow — the second-most important retailing metric. The first nine months shows $4.14 billion of it. Target also has $2.72 billion of cash on hand.

Trading TGT Stock

Which brings us to the challenge of gauging the direction of TGT stock price. The stock trades at 11x earnings, which isn’t expensive on an absolute scale. The problem is that net income is declining and investors pay for growth. Yes, to a certain extent they pay for the dividend, which is at a not-insignificant 4.3%. We also cannot ignore that in a bad environment for retail, TGT stock price hasn’t fallen below $48.56 per share, and is presently at $57.49.

The stock is somewhat buoyed by the dividend and the overpriced market as a whole. So I would not go anywhere near TGT stock as an investment here. However, traders may want to think about opening a position, hoping for an upside holiday sales surprise, which could result in some solid upside. I would set a stop loss at around $54 to be safe.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any of the aforementioned stocks. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/target-go-nowhere-stock/.

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