• Brett Schafer

Target is a Buy on the Trade War Dip

Shares of domestic retailer Target have lost some steam lately, down 12% in the last 30 days. Investors are worried about the escalating trade war with China (at least until talks start “progressing” again for the Friday pump) and how it will impact stocks exposed to the country.

However, I believe if you have a five-year time horizon, this short-term trade war dip can be a buying opportunity for something I think is a great value play. Target is already heavily discounted against big-time competitors Wal-Mart and Amazon (who just announced one-day shipping last week), seemingly forgotten by investors as society progresses into the digital age.

The Valuation

In a frothy market where valuations are looking more and more ridiculous, Target can bring some sanity to investors. You can check out all the metrics on Yahoo Finance, but for reference here are the main fundamentals of the stock:

  1. Trailing P/E of 13

  2. Forward P/E of 11.5

  3. P/S of .49

  4. Dividend yield of 3.38%

The earnings ratios are lower than the market average while the dividend yield is higher than the market average, a combination I love to see. However, this can only work if the underlying business is actually growing its earnings-per-share (EPS). Luckily, Target is doing just that.

Earnings Growth

As you probably picked up from the forward P/E and trailing P/E, Target is growing has been growing its annual earnings. In fact, 2018 was its best year in a long while. Here are the highlights from the 2018 annual report:

  1. Comparable sales up 5% YoY

  2. Digital sales up 36% YoY

  3. Guiding for EPS of $5.75 – $6.05 for 2019, up from $5.50 in 2018

While these are by no means not knock your socks off numbers, if you couple them with the current P/E and dividend yield Target stock looks like a no brainer. Obviously, they will need to continue growing their bottom line or the whole investment thesis is moot. But I believe they can do it, even with major competition from Amazon and Wal-Mart.

Target recently acquired Shipt, which allows them to offer two-hour delivery from 1,500 locations. They are also expanding their curbside pick-up service, something that, for the time being, Amazon cannot copy. Lastly, the company is opening up hundreds of “mini” Targets in Urban and College neighborhoods that should drive sales and foot traffic growth for the next few years.

I don’t think Target stock is going to 10x anytime soon, but for an investor weary about the valuations most of the market is at right now, this can be a stable play with a high dividend.

Note: Target is a part of our Market Brothers Portfolio, check it out here.

Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.


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