Target stock trades at a low valuation
So far, Target (TGT), Costco (COST), and Walmart (WMT) shares have gained significantly in 2019. The shares have outperformed the broader markets, which have risen ~17.5% on a YTD (year-to-date) basis. In comparison, Target, Costco, and Walmart stock have recorded YTD gains of 31.2%, 31.0%, and 19.4%, respectively.
Strong comparable sales, continued investments in growth, and a better-than-expected performance on the bottom-line front drove the stocks. However, when we look at the companies’ valuation, Target stock looks attractive compared to its peers.
Target stock trades at a forward PE ratio of 14.5x, which reflects a significant discount compared to Walmart and Costco. Target stock is trading at a discount of 37% compared to Walmart’s forward PE ratio of 23.0x. Target trades at a discount of 55% compared to Costco’s forward PE ratio of 32.0x.
Historically, Walmart and Costco shares have always traded at a premium multiple compared to Target stock. Despite trading at a lower valuation multiple, Target’s consensus EPS growth outlook is roughly in line with Costco. Target is better than Walmart, which makes it attractive on the valuation front.
Analysts expect Target’s adjusted EPS to mark double-digit growth in fiscal 2019. The company’s bottom line is expected to sustain mid to high-single-digit growth in fiscal 2020. Walmart’s bottom line is expected to stay low in the current fiscal year. Costco’s earnings growth rate is expected to decelerate and register mid to high-single-digit growth.
We expect continued momentum in comparable sales, an expansion of the digital fulfillment options, and better e-commerce margins to set the direction for the companies’ stocks. However, a high valuation will likely limit the upside in these stocks.