Target (NYSE:TGT) Is Still Cheap At New All-Time Highs

Target Is A Clear Winner

Target (NYSE:TGT) has long been a favorite of mine. The stock has gained more than 100% since I first called it a buy and there are more gains still to come. Strictly speaking from the perspective of value, the stock is trading about 22X this year’s earnings and in-line with the broad market but the consensus estimate is too low. The 3Q report brings the YTD EPS total to 92% of the consensus estimates which makes the Q4, FY 2020, and FY 2021 estimates are far too low. By my reckoning, this stock is trading closer to 19X this year’s earnings and ready to move up a couple of handles. 

Target Is Where The Shoppers Are Going

Walmart (NYSE:WMT) gave us some great news earlier in the week when it reported a 5.2% increase in YOY revenue but that was nothing compared to Target. My best-guess is that Target is doing a better job of picking up traffic from stores that went out of business over the summer. Regardless, Target saw its revenue surge more than 22% to beat the consensus by a full 900 basis points.

The revenue was driven by a 20.7% increase in comp-store sales that is nearly double the expectation and driven by eCommerce. Store traffic accounted for 4.5% of the gains, ticket average 15.6%, with a 155% increase in eCommerce. eCommerce sales account for 10.9% of the comp-sales gain and are accelerating on a QoQ basis.

"Our strong results in 2020 reflect the benefits of our multi-year effort to build a durable and flexible model, with a differentiated assortment and a suite of industry-leading fulfillment options — all brought to life through the passion and effort of our team. As a result, we've seen a deepening level of engagement and trust from our guests."

Margins also improved at both the gross and operating level despite an increase in costs. Margins increased 80 bps at the gross level but beat by 100 points while operating margins expanded 310 bps and beat the consensus target as well. Moving down to the bottom line, Target’s third-quarter performance resulted in GAAP EPS of $2.01 and adjusted EPS of $2.79 which beat consensus by $0.50 and $1.18. The company did not offer any guidance but that doesn’t matter. The company’s performance shows a clear trend of growth that should continue into the holiday shopping season at least.

Target, Safely Returning Cash To Shareholders

Target has a long history of safely returning cash to shareholders and that appeal has only improved over the last quarter. The company’s 1.65% yield is more than safe and should continue to grow for the foreseeable future. Not only is the payout ratio a low 37% and projected to get smaller but the balance sheet is a fortress. The company has some debt but it is a moderate amount and getting smaller as well. Over the course of the last quarter, Target deployed $2.3 billion in cash to retire $1.8 billion in long-term debt and closed out a short-term credit facility to boot. Those actions left the company with about $14 per share in cash, a leverage ratio near 2.5X FCF, and high coverage of interest payments. Investors may not see a robust distribution increase but they will see an increase next August.

The Technical Picture: Target Is Breaking Out To New Highs

The technical picture is fairly clear, Target is breaking out to new highs with a bullish bias on the long-term charts. When I say long-term charts I mean the really long-term monthly charts that point to a multi-year increase in share prices. What I am looking at, specifically, is the MACD. The MACD is showing a text-book convergence with skyrocketing prices that suggests strength in the underlying market. In this light, any weakness or price pullbacks on the lower time-frame weekly and daily charts should be viewed as a buying opportunity barring unforeseen news and/or catastrophic events.