The retail sector struggled throughout much of the 2000s, but some companies made a strong show during the COVID-19 pandemic. Two stores in particular – Best Buy Co Inc (NYSE:BBY) and Target Corporation (NYSE:TGT) – survived the turn of the millennium and redefined retail moving forward.
But each took a different path to get here and has a different roadmap moving forward. So, which is the better investment between Target vs Best Buy stock?
Best Buy (BBY) is an electronics giant and the only one to survive from the peak in the early 2000s. Where Circuit City, Ultimate Electronics, and CompUSA failed, Best Buy survived by transitioning to a retail showroom. Its mobile app, after-purchase service, and willingness to try new things helped it survive the Amazon (AMZN) retail culling.
Meanwhile, Target has a rabid following among shoppers who want a higher-quality shopping experience than rival Walmart (WMT) provides.The department store successfully scaled its curbside delivery, ecommerce, and in-store brands to meet the changing needs of post-pandemic shoppers.
Which of these retail giants is truly the best buy to hit ROI targets for investors?
Is Target a Good Stock Purchase?
Target (TGT) quadrupled its market capitalization from since the start of 2019. The company grew to an estimated $93 billion in revenue by 2021. Both comparable store and digital sales continue to outpace both the previous year’s and analysts’ estimates.
Analysts were concerned that sales would stagnate when the stay-at-home orders expired and people returned to normal routines. But it still grew traffic by 12 percent and sales by 9 percent, which is largely driven by its efficiency, quality, and partnerships.
The company started transforming itself into a modern mall, with Disney (DIS) and Ulta Beauty partnerships providing shops inside the store. This supplements the company’s billion-dollar brands, like Good & Gather food and Cat & Jack leggings, both of which drove over $1 billion in sales each over the past year.
Investors are still salivating at this dividend stock worth comfortably over $110 billion.
Target Financials: Buybacks + Dividends
Company guidance for the 2021 fiscal year indicates high single-digit percentage growth. This is after driving $25.2 billion in revenue in the second quarter, showing growth from both the previous quarter and previous year’s quarter. That led to $49.4 billion in sales for the first half of the year.
The top brass also elected to repurchase $1.5 billion in shares at the end of the second quarter, with another $1.8 billion approved by its board of directors. It also returns value to shareholders with a consistent dividend payment that grew to $3.60 this year.
The company consistently reinvests in the business and provides enormous shareholder value; it doubled earnings per share from $3.91 in the first half of 2020 to $7.82 in the same period this year.
The company has a great credit rating too, suggesting little concern is warranted regarding its balance sheet liabilities.
Is Target Overvalued?
Some analysts argue that Target is overvalued at its current market. This contention stems from its expected slowdown in growth over the next five years, and that means today’s investors are likely to experience a reduced return compared to those hopping on board from a couple of years ago.
From a discounted cash flow analysis perspective, there is still upside potential to $275 per share.
And the firm’s cash-to-debt ratio of 0.52 suggests little in the way of concern. The company is a defensive stock play that continues to generate profits – in fact, it was profitable for nine out of the last ten years. So, while investors aren’t likely to see big gains like the pandemic, they’re unlikely to experience a catastrophic outcome too.
But is Best Buy stock the better bet?
Is Best Buy Stock A Good Investment?
Best Buy seemed on its way to the retail graveyard before a turnaround effort in the mid-2010s.
This included shifting its focus to act as a showroom for customers to try expensive new technologies before they buy. This is a key sales tactic Amazon (AMZN) lacks and helps the over-$25 billion company stay in business.
The company isn’t ignoring ecommerce as a sales avenue though – it’s continuing to adapt to changing consumer habits by working with partners like Apple (AAPL) and Samsung to give them more control over in-store displays.
And analysts believe the company could be undervalued by at least 8 percent compared to other retailers, suggesting investors have a discounted buying opportunity at hand.
Best Buy Stock Forecast
Best Buy continues to report strong results. Second quarter revenue for its fiscal year 2022 came in at $11.85 billion, versus $9.91 billion in the same period of fiscal year 2021.
The company forecasts $52 billion in enterprise revenue for the fiscal year, with about 10 percent sales growth, nearly double prior estimates.
If it can surpass analyst estimates for the holiday season, investors could see a 10 percent gain. This is on top of a $2.80 annual dividend yield.
The company is trading for about 17 times earnings, which is much lower than rivals like Walmart (WMT) and Costco (COST), both of which trade over 30 times their respective earnings. However, this hasn’t changed much over the years, and the company still has a long way to prove it’s not acting as a showroom for Amazon.
Our need for technology isn’t going anywhere, but the competition is stiff, and Best Buy needs to prove its staying power.
Best Buy Vs Target Stock: The Bottom Line
Target and Best Buy survived the pandemic with unique strategies that blended ecommerce with delivery and curbside pickup. Each proved to have the necessary staying power required of brick-and-mortar retail in an age when online sales are king.
Some analysts believe Target is trading for well over its intrinsic value, and that’s going to cut into potential growth returns for its investors. Best Buy, on the other hand, remains undervalued according to consensus estimates and is considered a value buy.
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.