Target Corporation is the second-largest discount retailer in America – first is Wal-Mart (see more). Company was founded in 1902 year. Nowadays company operates around 1805 locations throughout the United States.

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Traditional stores generates around 97% of sales and only 3% is digital sales, nevertheless digital sales is growing rapidly which is positive in my opinion.

In 2011 – 2015 company were running unsuccessful business in Canada. Target decided to quit operations in Canada and sell Pharmacy and Clinic Business – both seems to be good moves. I think company is about to accelerate growth or return higher amount of cash to shareholders.

 

As it comes to financials (estimates):

Market cap ~ $42B

Net debt ~$10B

Payout ratio ~50%

ROE ~19.3%

Beta = 0.6

Dividend yield 3.2% + buyback, still to be spent $5b (out of $10b) from share repurchase program

 

Estimated valuation ratios:

EV/EBITDA = 7.1

P/E = 14.8

Fiscal year ends at 31 January.

 

Target Corporation is one of The Dividend Aristocrats (almost The Dividend King). Company is paying dividend from 1968 year. Current dividend yield is around 3.2%, which is above S&P500 average. For the last years we can see that dividend yield has been growing, with a peak of around 3.8% in 2014. For me current level is attractive.

 

Drawdown risk analysis:

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Current drawdown is around 20% which is an interesting level, but it is not a special occasion. In my opinion 25%-30% drawdown is a good entry point, which means around $61 – such level would mean both attractive valuation and dividend yield. It’s still around 10% to fall but I hope that weakness of broad market can make it happen. Then P/E around 13, EV/EBITDA around 6.3

 

Company is valued similarly to Wal-Mart – on DY, EV/EBITDA and P/E. The case is that over the last year WMT share price is around -25% and Target is -5%. In my opinion it’s better to invest in WMT nowadays, but Target doesn’t look bad as well. I see that WMT should be traded with premium to Target – due to a bigger size and stronger market position.

 

Summing up, I like Target Corporation but I think I can wait for special price, which for me would be around $61. Valuation of around P/E15 is nothing special from historical perspective and with a weak stock market I see potential to further share price decline.

 

Disclaimer TGT – no position, WMT – long.