12 Aug

Is Target Stock a Buy on Recent Dips?

WRITTEN BY Amit Singh
  • Target stock has declined from its recent highs amid escalated trade war concerns.
  • The retailer is driving profitable growth, and the recent dips in its stock price could well be a buying opportunity.

Target (TGT) stock declined from its recent highs as escalated trade war concerns are taking a toll on most of the retail stocks. Higher tariffs are a concern as they could lead to higher prices and, in turn, affect consumer spending. However, the impact on Target Corporation could be relatively low. Besides Target, we expect Walmart and Costco (COST) to remain relatively immune to these trade war concerns.

Large retailers like Target, Walmart, and Costco already have contingency plans in place. Moreover, their multi-category portfolio reduces risk. Target sources goods from vendors that have a diversified manufacturing base, which helps mitigate risk. Similarly, Costco lowered order commitments on some of the items. Moreover, it’s finding ways to reduce costs by sourcing low-priced goods from the US and alternative countries.

In the near term, these mass merchandisers are expected to keep prices low, given their massive scale and ability to negotiate with vendors to reduce costs. Continued investment in pricing could provide a cushion, although this could come at the expense of margins. However, a prolonged trade war could push prices higher and hurt consumer spending.

Target stock to benefit from profitable growth

Target has multiple catalysts that could push its stock higher in the coming quarters. The retailer is firing on all cylinders, as its comparable sales have been the best in a decade. On average, the company’s comp sales have increased 5.1% in the last four quarters.

The expansion of digital offerings led Target’s stellar growth in comps. The company’s e-commerce platform has been the key growth engine, driving comps higher. During the last reported quarter, Target’s digital sales jumped 42% due to the expansion of its same-day delivery services.

The company has significantly boosted its delivery capabilities with Shipt, and it’s leveraging its stores to reduce time and save last-mile delivery costs. The company is fulfilling about 80% of its digital orders through its stores.

Target’s ability to offer fast delivery along with expanded offerings is expected to drive comps and, in turn, profitability. Also, its remodeled stores are highly productive, which is good for the margins. Target’s operating margins improved during the last reported quarter. We expect its margins to show ongoing gradual improvement as the company focuses on reducing costs, and its favorable mix is expected to support margins.

We expect Target stock to benefit from profitable growth in the coming quarters. Moreover, Target stock trades relatively low when compared with Walmart and Costco. Target’s forward PE multiple of 13.7x is about 38% lower than Walmart’s forward PE multiple of 22.0x. Moreover, Target stock trades about 59% lower than Costco’s forward PE multiple of 32.9x.

In our view, low valuation, robust sales, double-digit EPS growth, and improved margins outlook should support Target stock in the coming quarters.

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