I didn’t look at Target for a while and my Dividend Aristocrat Valuation spreadsheet shows, that it is one of the cheapest companies now. Let’s have a closer look, as share price is volatile lately and we are on the level from the end of 2014, while market is at all-time highs.

First of all let’s have a look on top line:

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We can see that sales dynamics is strongly negative. With retail business first and foremost is to grow on top line, so then earnings / margins can be higher.

In case of Target case is a little bit different. We can see that comparable sales looks like much better than total sales (Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions that we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. We removed pharmacy and clinic sales from the 2015 sales amounts when calculating 2016 comparable sales.).

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OK, obviously we can see that previously there were positive dynamics and now it is fluctuating around 0. That’s bad, but it is not the end of the world.

Let’s see on consolidated statement of Operations:

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We can see two very important issues:

  • Company buy-backed tremendous number of shares over the last year – around 9%!
  • EPS is growing (ok, due to buybacks, but as a shareholder for me EPS is important)

Apart from buybacks company is paying dividends, around 3.4% – decent yield, historically one of the highest. Payout ratio is still not high, though 11b net debt is quite big (I prefer companies with low debt, as for me they are safer).

The biggest problem is that Target is selling mainly through traditional stores. Digital sales is growing, but it is just 3.5% in nine months 2016 (vs 2.7% in comparable period). OK that’s a problem, but does it mean that company should be so cheap?

Current valuation (2017 consensus):

P/E = 13.5

EV/EBITDA = 6.8

Not bad, as in 2018 there is further growth in EPS expected.

 

Summing up, it is not a sexy business, but safe, cheap and in line with Dividend Growth Investor policy. I am seriously consider buying TGT and I think that losing money when buying at around $66-$67 is limited, as downside is not high. On the other hand no one should expect super high rate of return, as business is long term in weak position versus Amazon.

 

Disclaimer: TGT – no position