What’s Next For Target’s Stock After A 30% Rally

After a 30% rise since the March lows of this year, at the current price of around $118 per share (as of July 8th), we believe Target’s stock (NYSE: TGT) still has more to go. The big-box retailer has benefited from the shift to e-commerce due to its longtime omnichannel approach. It invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores. This resulted in a stellar 278% growth in same-day services in the recent Q1. Having convenient services for same-day business and purchasing changes brought about by Covid-19 seems to be working well for the retailer.

Target’s stock is already about 97% higher than it was at the end of 2017, a little over 2 years ago. Our dashboard, What Factors Drove 96% Change in Target’s Stock Between 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 7% increase in Target’s revenues from $72.7 billion in 2017 to $78.1 billion in 2019. In addition, earnings growth, on a per-share basis, was higher by 21%. This was driven by a 20 bps net margins expansion from 4.0% to 4.2% and a 7% decline in shares outstanding during this period.

Finally, Target’s P/E ratio increased from about 11.5x at the end of 2017 to 20x at the end of 2019. While the company’s P/E is now around 18.5x, it could expand further as the demand for groceries remains high in the near term. We believe the stock is likely to see more upside despite the recent rally.

So how has Coronavirus impacted the stock?

Target saw a worried public stocking up on food and essentials like medicine and cleaning supplies during the lockdown period. The retailer also saw a boost in products related to in-home activities, such as home office and entertainment needs. Consequently, Target’s revenue grew a robust 11% year-over-year to $19.6 billion in Q1. The company also reported a comparable-store sales growth of 10.8% in the first quarter vs. consensus of +7.5%, driven by a 12.5% increase in the average basket size (as customers made fewer, bigger shopping trips).

It should be noted that the comparable digital channel sales were up 141% for the quarter and contributed 9.9% to overall comparable sales growth. In all for the quarter, 15.3% of the business’ revenue (close to $3 billion), came from its e-commerce operations. This compares to 7.1% at the same time last year. While revenue rose, net income took a beating, dropping 64% y-o-y to $284 million. A decline in sales of higher-margin items like apparel as well as coronavirus-related costs (mainly costly e-commerce infrastructure) weighed on first-quarter profitability.

Target has been able to adapt to a new normal and could thrive going forward as well – given that people are getting back to work and the economy is starting to pick up again. The retailer is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up. In addition, as shoppers return to their usual buying habits, there could be a surge in Target’s sales in apparel and other higher-margin discretionary categories. Going by our Target’s Valuation, with an EPS estimate of $4.96 and P/E multiple of 24.8x in 2020, this translates into a price of $123, which is marginally ahead of the current market price.

While Target’s stock may have a slight near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Did you know that Home Depot stock has also fared well due to the stay-at-home bump? We discuss more on this here – What Factors Drove 40% Change in Home Depot Stock Between 2017 and Now?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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