Is Target Stock Poised to Grow Further?

Target (TGT) stock has generated stellar returns this year, outperforming broader markets by a wide margin. The stock had risen 60.6% year-to-date as of Friday, while the S&P 500 had risen about 18%.

Furthermore, Cowen analyst Oliver Chen expects Target stock to rise even more. On September 26, Chen raised his target for TGT stock to $130 from $120. He maintained its “outperform” rating.

Chen’s increased price target for TGT implies a 22.5% upside based on its September 27 closing price of $106.12. The analyst expects Target’s sustained sales momentum, lower valuation, and improved margins to boost its stock.

Target and Walmart (WMT) could both strengthen this holiday season. Their digital transformation, same-day delivery expansion, compelling brands, and value pricing could bode well for growth. Macroeconomic factors, including higher employment and wages and lower taxes, are likely to favor these retailers. Holiday sales projections are encouraging, indicating the retailers could see higher sales.

Target remains well positioned

Target’s same-day fulfillment services (including drive-up, order pick-up, and Shipt) could continue to drive its comps. In this year’s second half, it expects comps to rise 3.4%, which is encouraging given the retailer is up against tough year-over-year comparisons. Target’s easier shopping, compelling brands, and competitive pricing could further drive traffic.

Target’s favorable mix and higher productivity savings could also expand its profit margins. Furthermore, its sustained comps growth and wider margins could grow its bottom line and support its stock. TGT’s low valuation compared with peers makes it an attractive bet.

TGT stock trades 16.4 times analysts’ forward earnings estimate, well below peers’ average of 21.5x. Moreover, TGT stock trades at 9.0 times its forward enterprise-value-to-EBITDA multiple, also below peers’ average of 12.0x.

What could limit Target stock?

We believe Target’s digital initiatives, improved margins, and low valuation could support its stock. However, given its recent surge, TGT’s upside may be limited. Consumer confidence appears to be dampening, with the Conference Board Consumer Confidence Index falling 9.1 points to 125.1 in September from 134.2 in August.

Wells Fargo analyst Ike Borucho is somewhat bearish on holiday retail sales. He expects weather issues, a stronger US dollar, and a shorter holiday calendar to hurt retailers in the holidays.

Most analysts covering Target suggest “buy.” However, their average price target of $110.88 for TGT implies a meager 4.5% upside based on its September 27 closing price.