Target Stock Needs a Big Earnings Report

Advertisement

TGT stock - Target Stock Needs a Big Earnings Report

Source: Mike Mozart via Flickr (Modified)

This coming holiday season is a big one for retail and Target Corporation (NYSE:TGT) is a perfect example why. The past few years have been uneven for retail stocks like TGT stock, which might be putting it mildly. Target stock itself fell from $80-plus to below $50 in 2016-2017, then nearly doubled in barely a year before yet another pullback of late.

Those moves echo those of brick-and-mortar retailers more broadly. Fears toward the sector started to escalate in early 2016, as the threat of Amazon (NASDAQ:AMZN) cast a shadow. Protestations fell flat from retail executives that “the economy,” rather than sweeping changes across the industry, was to blame for weak results. The entire space, including Target stock, saw a broad, almost panicked selloff.

Starting last summer, however, sentiment started to turn. Retail stocks started to look awfully cheap: TGT stock at one point traded at just 11x earnings. And as Target and Walmart (NYSE:WMT) and myriad other retailers built out their omnichannel capabilities, investors realized maybe Amazon wasn’t going to take over the entire U.S. economy — and brick-and-mortar shops might even be an asset in the new retail model.

Now, heading into the always-key holiday season, it seems like investors are looking for direction. Target stock has pulled back close to early-year highs. Walmart stock continues to whipsaw after earnings reports. Kohl’s (NYSE:KSS) has pulled back. Nordstrom (NYSE:JWN) plunged on a mixed report. Investors seem unsure of how the myriad changes in retail will play out.

For Target stock, in particular, that sets up a very important report on Tuesday morning.

Target Earnings Expectations

Street estimates for Q3 do look a bit dicey for TGT stock. Expectations are reasonably high, particularly in terms of sales, with the Street looking for 6.7% overall revenue growth. Considering that company drove same-store sales growth over 6% in a monster Q2, that figure looks achievable.

Per-share earnings estimates of $1.12 imply 23% year-over-year growth. Even with some help from tax reform, that figure, too, looks potentially stretched.

Q3 isn’t the only hurdle, however. As impressive as Target’s first-half numbers looked, the company did benefit from easier comparisons. That changes starting in the fourth quarter. Analysts are expecting only modest revenue growth – just 0.6% – and a deceleration in earnings, to just a 10% increase for the quarter and just 5% for the following full year.

So even if Target can “beat” on Q3, the outlook for the holidays, and beyond, looks particularly important.

How TGT Stock Falls Further

That outlook looks the biggest risk to Target stock coming out of the report. Proof can be found by simply looking at last year’s Q3 report. Target beat estimates for the quarter – but disappointing Q4 guidance sent the stock lower.

TGT stock obviously would recapture those losses – and then some. Q4 results actually were quite impressive, starting a three-quarter streak of notably improved results, particularly in terms of same-store sales.

But that’s also why Q4 guidance is so important this time around: the comparisons suddenly get much tougher. That, too, is why analysts are expecting much lower growth in this year’s fourth quarter.

If those expectations are even only met, it’s not good news for Target stock. The story here looks much less attractive. Yes, Target put together a nice four-quarter stretch (assuming a Q3 beat). But it benefited from comparing against two pretty weak years — and once comparisons got tougher, the company couldn’t keep growing.

Target still looks like a distant third to Amazon and Walmart in omnichannel. Growth expectations come down. TGT stock in that scenario probably gets a 12-13x P/E multiple and a ~4% dividend yield — and it putters along as a value trap/value play argument priced in the $60s.

How Target Stock Can Gain

Conversely, a big holiday season changes the story here. Lapping tough growth and providing better numbers suggests real payoff from the investments in omnichannel, private label, and wages. And it opens the path I detailed back in June, with TGT stock at roughly the same price:

There’s a reasonable path from a current price below $80 to well over $100. Modest EPS growth over the next two years (think 8-10% a year) would get EPS well past $6. A EPS multiple in the 16-18x range, which is in line with past valuations, and closer to that of WMT, would value TGT stock in the range of $100-$115.

I concluded that article by writing:

So there’s still upside to betting on Target stock. The question is whether that bet is worth taking, and the answer will rely heavily on whether the billions the company is spending in 2018 pay off in 2020 and beyond.

That last sentence is why the Q3 report, and Q4 guidance, are so important. We’re going to start to find out ahead of the key holiday season if those investments are paying off now – and in the future. If they do, TGT stock moves higher from $78. If they don’t, this looks like a second-tier, low-growth retailer, and the stock falls. It’s really that simple – and it’s why Tuesday’s release is so important.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/target-stock-needs-big-earnings-report/.

©2024 InvestorPlace Media, LLC