Target: Why Analysts See More Upside Post-Q3

Target (TGT) stock closed 14.1% higher on November 20 thanks to the company’s remarkable performance in the third quarter of fiscal 2019. Moreover, the stock was up 91.3% YTD (year-to-date) as of November 20.

TGT’s phenomenal growth is the result of the company’s stellar financial performance in the first three quarters of fiscal 2019. Apart from providing a robust financial performance, the company continues to boost shareholders’ returns through dividends and share repurchases.

Target has also raised its full-year EPS outlook again, which has received fanfare from both investors and analysts.

Several analysts raised their target prices on Target stock following the retailer’s upbeat performance and higher guidance. They made the following upward revisions:

• Cowen increased its target price to $145 from $130 with an “outperform” rating. This new price implies an upside of about 15% based on its closing price of $126.43 on November 20.
• Nomura raised its target price to $136 from $123 with a “buy” rating. This price implies an upside of about 8%.
• Telsey Advisory increased its target price to $137, implying an upside of 8.4%. It has a “buy” rating on TGT.
• KeyBanc raised its target price to $140 from $130, implying an upside of about 11%. It has an “overweight” rating on Target stock.
• Jefferies increased its target price to $137, implying an upside of 8.4%.
• Citigroup increased its target price on the stock to $150, implying an upside of about 19%.

Among the 28 analysts covering TGT, 18 suggest “buys,” and ten analysts have “hold” recommendations. Analysts have an average target price of $130.37 on TGT, implying an upside of about 3.1% based on its closing price on November 20.

Target posted better-than-expected third-quarter results on November 20. The retailer’s top and bottom lines crushed Wall Street’s expectations. Its comps rose 4.5% YoY (year-over-year), better than its management’s expectation of 3.4% growth. Its traffic showed 3.1% growth, while its ticket size increased by 1.4%.

The company’s digital sales continued to thrive and rose 31% on the back of the expansion in its same-day delivery services. Its adjusted EPS jumped 24.9% YoY to $1.36 and came in well ahead of Wall Street’s expectation of $1.09.

Thanks to its robust financial performance, Target once again increased its adjusted earnings outlook for fiscal 2019. Earlier, the retailer had increased its full-year EPS guidance by $0.15. Now, it expects its adjusted EPS to be in the range of $6.25–$6.45, up from its previous guidance of $5.90–$6.20.

In the fourth quarter, Target expects its adjusted EPS to be $1.54–$1.74. It also now expects its comps to increase by 3%–4% in the fourth quarter.

We expect Target stock to continue to gain from sustained momentum in its comps growth rate. Its expansion of same-day delivery, investments in merchandise, and robust set of owned and exclusive brands are likely to support its sales growth during the holiday season. Its continued margin expansion and share repurchases are also likely to drive its earnings and, in turn, its stock.

However, because TGT has surged more than 91% so far this year, any further upside could be limited. Its sales and EPS growth are also likely to moderate in the coming quarters, as it’s up against tough YoY comparisons.

TGT continues to trade at a discount compared to Walmart (WMT) and Costco (COST) stocks, which could support its upside. It’s trading at a forward PE multiple of 18.9x, well below Walmart’s and Costco’s 23.4x and 35.0x, respectively.

Shares of Walmart and Costco have risen 27.9% and 47.5%, respectively, YTD. Meanwhile, the S&P 500 is up by about 24.0%.