Target: Has the Market Already Priced In a Lower Tax Rate?
YTD stock performance
Target (TGT) stock has fallen 13% on a YTD (year-to-date) basis as of December 4, 2017. However, in the past week, it has had a strong recovery, rising 12%. That includes the gain on Monday, December 4, 2017, that we talked about in the previous part of this series. But we have to ask these questions: Has the market already priced in the anticipated corporate tax rate cut? Is the stock being driven higher by possible earnings increases due to tax reforms, or is it the company’s improving fundamentals?
The tax reform bills have passed the House and the Senate but still need to be reconciled into one bill that could be changed. So let’s look beyond the anticipated tax benefit and focus on Target’s fundamentals and current valuation.
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Recent past and the near future
Target (TGT) reported better-than-expected fiscal 3Q17 earnings. However, pressure on margins from continued business investments remained a drag and lowered the quarterly EPS (earnings per share). Analysts expect the company’s EPS to continue to slide as increased price investments and higher digital fulfillment costs related to higher digital sales are estimated to hurt its profitability.
The company’s sales did impress investors. However, a weak holiday sales outlook played spoilsport. The company expects its fiscal 4Q17 comps (comparables) to remain even or increase 2%. Analysts expect Target to guide better on sales, given its strong investments in growth initiatives. As for 2017, the company projects its comps to stay flat or grow 1%.
On December 4, 2017, Target was trading at a forward PE (price-to-earnings) multiple of 14.7x. However, given the company’s sluggish growth expectation, its low valuation may not attract a lot of investors. In comparison, Walmart (WMT) and Costco (COST) stocks are trading at a forward PE multiple of 21.0x and 29.4x, respectively, which is significantly higher than Target’s. Costco and Walmart are both seeing significant growth due to strong sales.
The S&P 500 (SPX-INDEX), which has risen 18% on a YTD basis, is currently trading at a forward PE multiple of 18.7x.