Is Target Stock Overvalued?

Target Corporation (NYSE:TGT) is succeeding at a time when the retail industry is reeling from its biggest losses in recorded history.

The beloved retailer has an all-time high market cap over $80 billion, nearly double what it was at its low during the coronavirus crash.

It’s also taking care of its employees, handing out $70 million in bonuses and raising minimum wage to $15 per hour heading into the 2020 holiday season.

This isn’t even its first round of bonuses during the pandemic. But while employees and customers are happy, it remains to be seen how happy investors will be entering the stock over $160. so, is Target stock overvalued?

That’s the question we’re going to answer as we take inventory of how the company handled the coronavirus pandemic.

This Minnesota-based company is a component of the S&P 100 and S&P 500. It’s the eighth largest retailer in the U.S., and you’ll find people who consider it holy ground in the face of competition from (NASDAQ:AMZN) and Walmart Inc (NYSE:WMT).

We pull back the covers to see how Target became a hot investment in 2020’s turbulent market.

Why Target Stock Went Up

Target is in small company when it comes to retailers who gained during the pandemic. As panic shopping swept the globe, the company recorded an 80 percent increase in profits to $1.7 billion.

Much of this was on the back of Drive Up, the company’s curbside pickup service, which grew 700 percent year-over-year from the second quarter of 2020.

Its stock prices are up about a third from 2020, when it was already experiencing record highs. That’s more than Walmart, which only gained a quarter in the same timeframe.

It also used Amazon’s Prime Day to launch its own competing Deal Days in October that recorded a sales increase of 250 percent from the previous year. This proved the company’s cool factor and brand loyalty is still strong heading into the 2020 holiday season.

The only questions remaining revolve around how well the company will perform on Black Friday and Cyber Monday. This crucial post-Thanksgiving weekend drives the bulk of retail sales for the year. It’s using its large footprint of over 1800 stores helped the company recover from a rough year.

And it was rough – the company remain open for business during the pandemic lockdowns, but it was several times the victim of looting during the civil unrest that marked the summer of 2020. Still, the company’s balance sheets have investors salivating.

Target Financials Are Rising Impressively

Target’s second quarter earnings report showed GAAP earnings per share of $3.35 in the second quarter, an 84.4 percent increase from $1.82 in the same quarter of 2020.

Total revenue for the quarter was $23 billion, with operating income of $2.3 billion. The company’s gross margin rate is 30.9 percent, which is better than 2019 and boosted by higher sale-through rates for its inventory.

Target’s long-term debt did rise, however, from $10.2 billion in 2019 to $11.3 billion in 2020, and that cost $122 million in interest.

The company’s 2019 annual revenue was $78.1 billion, which isn’t far off from its 2020 market cap. Net earnings were $3.281 billion for the year, and it has $12.902 billion in cash and inventory (total assets are $42.779 billion, and it has over $31 billion in short- and long-term liabilities).

It’s still only a fraction of Walmart’s $400+ billion market cap, and thus some analysts believe the company is a solid Buy for both growth potential and long-term stability.

This helped the company raise its quarterly dividend payment to $0.68, or $2.72 annually, in 2020 while experiencing an all-time high market cap.

Of course, a record high capitalization also comes with concerns that investors may be overpaying by investing in Target now. 

Is Target Valuation Too High?

Although Target is experiencing an all-time high, it has several things going in its favor to justify its valuation. For starters, it’s only trading for 23 times earnings, compared to competitor Walmart, which is trading at 27 times earnings.

Its dividend yield is also slightly better than Walmart’s at 1.7 percent versus 1.5 percent. Both companies are actively working to compete against the online juggernaut that is Amazon, with is Whole Foods brick and mortar.

Even the most bearish of investors admits Target is undervalued below $180 entering the holiday season. This means the company represents a possible value for those who jump in early enough to take advantage.

However, just because it’s having a good year during the pandemic doesn’t mean the brand is impervious to recession.

It also lacks the scale of both its larger competitors, leaving some wondering if Target may actually drop from its current value.

Will Target Stock Drop?

Most analysts have Target rated at a price around $180 per share. It outperformed the bulk of its sector and the greater market with same-store sales rising to record levels in the face of the pandemic and lockdowns.

It’s improving margins and hopes its sales strategy will resonate with consumers during the upcoming holiday rush.

If Target drops, it’s unlikely to do so until midway through 2021. Its holiday 2020 sales are likely to be enough to continue fueling gains comfortably over the $180 Buy point. When combined with dividend earnings, this should be enough for investors to ride out at least until the summer. You’ll want to reassess the investment at the start of the year.

Is Target Stock Overvalued? The Bottom Line

Target Corporation is a Minnesota-based retailer that experienced big gains during the coronavirus pandemic. This is because the company has fierce brand loyalty, a strong retail footprint, and popular ecommerce and financing options.

Its curbside pickup services spiked while foot traffic in store lagged during the shutdowns. This gives many analysts a strong positive outlook for Target as an investment for the foreseeable future.

It’s not going to be an easy road though. The company faces increasing competition from both Walmart and Amazon, and it doesn’t have the scale to fight them both in every market.

It has strong growth opportunity with the rest of retail struggling, and even the most bearish investors admit the company is doing well. The only question is whether it’s a better buy than its competition.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.