In my previous posts I was writing about WMT and AMZN. Now it is time for TGT. As you know at the end of January I bought 31 shares of Target @63.84. Well in my last analysis of TGT I wrote that “it is not a sexy story, but very cheap!”. In fact after weak results and significantly cut guidance it is time to rethink whether it is still cheap…

Let’s look key data:

Market cap is $32b, net debt $12b.

  • For full-year 2016, GAAP EPS from continuing operations declined 12.7 percent to $4.58, reflecting a loss of $0.44 on the early retirement of debt.
  • Full-year Adjusted EPS2 increased 6.7 percent to $5.01. -> P/E16 = 11.6, but that’s history and future matters. I will keep this value in mind to know what’s earnings potential of Target. If ever again company is to generate such EPS then upside is huge
  • Target returned $5.0 billion to shareholders in 2016 through dividends and share repurchases. That’s another awesome number. With current market it is around 15% return to shareholders! This means that investors are paid back within 7 years (assuming constant cash flow generation, which is quite ambitious assumption. The problem is that company was buying back shares at prices significantly higher than today ($66.52 and $76.77)

And now guidance comes:

  • In first quarter 2017, Target expects a low-to-mid single digit decline in comparable sales, and both GAAP EPS from continuing operations and Adjusted EPS of $0.80 to $1.00.
  • For full-year 2017, Target expects a low-single digit decline in comparable sales, and both GAAP EPS from continuing operations and Adjusted EPS of $3.80 to $4.20.

That’s tough. EPS decline from $5.01 to around $4 means 25% decline in earnings. For stable business it is a lot. With EPS = 4 current P/E = 14.5, that’s below market multiple, but earnings momentum is negative and I am not sure that in 2018 we will see increase in EPS. Also from dividend perspective we can note that payout ratio will significantly increase, but I see no risk for increased dividend in short term.

How about future?

Company wants to invest $7b over next 3 years. It means slightly above $2b per year. For the last year there was 5.5b operating cash flow, so even if company generate less then there is still space for return to shareholders.

Company presents quite ambitious “targets” to Invest in growth on traditional market etc. For me it is hard to say whether they will accomplish their aim. What I plan is to track their progress. If they succeed then valuation is attractive. Otherwise… well, sometimes bad investment decisions happen.

 

Summing up, I am keeping my shares, but I see no reason to buy more… if I see operating progress then I will consider buying more shares.

 

Disclaimer: long TGT