Shifting Targets: Are These Two Stocks A Better Bet Than TGT?

If you are a Target (NYSE: TGT) stock investor and took advantage of the stock’s reasonably strong run-up over the past month, it may be time to look elsewhere. As of this moment, we find Edgewell Personal Care (NYSE: EPC) – a consumer products company that sells shaving, sun care, and feminine care products – and AerCap Holdings (NYSE: AER)– an aviation leasing company – to be better bets than Target stock.

Why? Simply because the valuation and growth numbers tell us so. Edgewell Personal Care and AerCap Holdings stocks have both seen higher growth in revenue and operating profits than Target in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Target.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than TGT – EPC & AER Stocks

Specifically, to illustrate the opportunity for Edgewell Personal Care, you pay $7.8 per dollar of earnings-before-interest-and taxes (EBIT) for EPC stock versus $12.92 for TGT, and get higher annual growth (2.0% vs -2.4%), higher quarterly growth (0.2% vs -3.1%), and better margin trend (1.8% vs 1.8%). Overall, you get higher revenue, and operating profit growth from Edgewell Personal Care and AerCap Holdings, and pay less than TGT stock. See our complete dashboard analysis of  Better Bets Than TGT Stock

So What’s The Catch?

Now, could Target buck the trend? Could it grow its revenues and profits much faster than Edgewell Personal Care or AerCap Holdings in the coming quarters? Of course that’s possible. Target saw considerable headwinds following Covid-19 due to high levels of inflation, lower discretionary spending, and a glut of merchandise which hurt margins. However, things have been picking up of late, with the company posting a better-than-expected set of Q2 earnings. Sales were up 2.7% year-over-year, led primarily by stronger digital sales. On the cost front, the operating expenses decreased sharply in Q2 as a percentage of revenues, leading to an operating margin of 6.4% compared to 4.8% a year ago. Inflation has also shown signs of cooling and this could give customers more room to spend on discretionary products, driving stronger revenue and profit growth for Target. 

The data below shows both Edgewell Personal Care and AerCap Holdings outperformed Target recently and over the last year. They might repeat this. Related ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Target, To Get More Revenue And Profit Growth?

While AER has seen the strongest revenue growth of the three in the last twelve months as well as in the last quarter, TGT has seen the slowest growth over the period. Moreover, TGT margins have seen less of an expansion versus AER over the last twelve months. However, despite this, TGT stock trades at a higher price-to-operating income ratio of almost 13x, compared to levels of roughly 8x for EPC and AER.

What About Relative Market Returns?

AER stock has shown a stronger market performance, with returns of 22% over the past 6 months, and 54% over the past 12 months. In comparison, TGT returns for the same periods were weaker 4%, and 29%, respectively, although it outperformed marginally over the last 3 months.

How Did These Metrics Look 1 Year Ago – Could TGT’s Combination Of Higher Valuation & Lower Growth Persist?

TGT still had a higher valuation of $16.42 vs $9.63 for EPC but lower annual growth (2.1% vs 4.7%), lower quarterly growth (0.6% vs 9.3%), and less favorable margin change (-3.9% vs -1.3%).  The situation looks quite different now which means that market reward could switch in favor of EPC and AER.

Investment Thesis For AER and EPC

While TGT is set to see a turnaround after a couple of tough quarters, AerCap and Edgewell are also seeing multiple tailwinds. Aircraft leasing major AerCap stands to benefit from rising demand for travel following Covid-19. More importantly, persistent production issues at aircraft major Boeing have led to an undersupply of commercial aircraft causing lease rates to trend higher. There could be more room for growth, given that the supply issues are likely to persist in the interim. 

EPC has well-known recognized brands such as Schick, Wilkinson Sword, Carefree, Banana Boat, and Hawaiian Tropic, which give it a strong competitive position. The stock could also be viewed as a defensive bet, with considerable protection during economic downturns on account of brand loyalty as well as recurring demand for personal care production. Moreover, the company has also been generating strong cash flows, which enable it to invest in acquisitions to enhance its product portfolio, besides driving shareholder returns via dividends and buybacks.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/28/2024
[2] Cumulative total returns since the end of 2016

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