Target (NYSE:TGT) reported a huge Christmas season and investors swooned. Revenue for the three months ending in January was up 21%, at $28 billion. Net income rose 65% to $1.38 billion, $2.76 per share of TGT stock.
Good news had been telegraphed in January with word that same store sales rose 17%. The final numbers were even better because online sales were up 118%. Target brought in an estimated $9 billion in sales last year that previously went to other companies.
While it has built a “durable, scalable and sustainable business model,” CEO Brian Cornell was cautious in his outlook. He called current shopping patterns “highly fluid and uncertain.” Shares rose about 1.4% in trading before the earnings, and another 1.4% in pre-market trading after they came out.
High-Flying TGT Stock
At its early March 2 price of $189, Target has become a very expensive stock which has earned the love of those who hold it.
Shares hit a pandemic bottom of $99 late last March and are now up 80% over the last 12 months. Investors have also picked up $2.70 a share in dividends since then. If you bought on my recommendation last April, you’re up 66%, nearly twice the gain of the S&P 500 Index average.
I saw Target coming a mile away. Back in 2018 I recommended it after a miss on earnings. I wrote then that Cornell has invested to make his stores a destination and created highly profitable store brands.
He’s not out of good ideas. Target is buying warehouses that can become inner-city distribution centers. The company continues to come up with great merchandising ideas. Its alliance with Apple (NASDAQ:AAPL) continues to bear fruit. It pioneered smaller store formats and that’s becoming an industry trend.
But you can get too much of a good thing. Target’s market cap is now equal to its annual sales, which is a danger sign. The once-generous dividend now yields just 1.46%, another danger sign.
Consolidation Needed
Target has been a big pandemic winner. While it could continue to make gains as vaccines come on, new fiscal stimulus will also create other opportunities. There will be more competition for the investor dollar.
Target is also going to see cost pressures. Costco Wholesale’s (NASDAQ:COST) decision to raise its wages will create competition for high-quality workers. Supply chain pressures and fuel price rises will also have to be accounted for.
It’s hard to see year-on-year profits rising 65% in that environment. While the company will remain sound, some people are bound to take profits — as evidenced by the eventual 6.8% drop on Monday.
I was early on this call but at some point, it will come true. Target will become a cheaper stock relative to the market. Right now, it’s much more expensive than Walmart (NYSE:WMT), which sells for 70% of its annual revenue and even has a better dividend yield.
I’m not alone in this. People who read stock charts say Target stock is now out of range for bulls. Some are even recommending option trades to take advantage of a fall at minimal risk.
The Bottom Line
If you’re looking ahead five or 10 years, I can’t argue against buying TGT stock. It will come good, even at these prices. Over on Tipranks, 10 of the 12 analysts following the stock still call it a buy, with an average price target 16% ahead of where it is now.
But if you have a shorter time horizon, or if you’re an income investor, it might be time to look elsewhere. Winning streaks end even for the best teams. Take some profits and get yourself something nice, maybe at Target.
At the time of publication, Dana Blankenhorn directly owned shares in AAPL.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
