Are Target Investors Aiming Too High?

With shares of Target Corp. (NYSE:TGT) trading at around $70.17, is TGT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

As most investors already know, Target mostly blamed the weather for its mixed to disappointing Q1 performance. In most cases, a company blaming the weather is absurd and nothing more than an excuse. If the weather is an issue, then the company complaining should get some products on the shelves that match the current environment. However, Target's excuse is at least somewhat justifiable because the weather seemed to affect the majority of the industry opposed to just Target. Seasonal items such as gardening equipment and spring apparel didn't sell as well as anticipated. High-priced electronics have also been performing poorly, but this has been more a long-term problem, and it might serve as a warning sign that the consumer isn't as strong as advertised, but that's a story for another time.

Target saw 1.0 percent sales growth year-over-year, but sales for stores open at least one year declined 0.6 percent. Therefore, this is one of those stories that are a bit challenging to figure out. Then again, those stories are the most fun. It's possible that Target is provided the answer by lowering its full year earnings expectations to $4.70-$4.90 from $4.85-$5.05. However, if that's the case, then how come the stock hasn't been hit? It's likely because savvy investors realize that uncooperative weather is always a temporary problem, and that lowered expectations have the potential to lead to future upside surprises. On the other hand, the consumer isn't exactly strong at the moment, so there is still risk.

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Optimists will say that Target attracts consumers looking for a bargain, which makes a weak consumer less of a concern. Pessimists will say that Wal-Mart Stores Inc. (NYSE:WMT) and dollar stores are better options for those looking for bargains. The reason Target has been such a tug-of-war story is because both camps have valid points. Yes, Target is a good option for budget-conscious consumers, and yes, there are better options out there. A lot depends on location (as always).

Speaking of location, Target is in attack mode in Canada. It opened 24 stores in Q1, and it plans on opening 124 stores total in 2013. This will lead to a short-term cost that will hurt earnings, but it should be a winning investment over the long haul.

City Targets should also help growth because these stores will simply attract more consumers thanks to convenience.

As far as online goes, digital sales growth is in the high teens, but according to Alexa.com stats, the past three months haven't been that impressive. Over that time frame, pageviews-per-user has declined 3.71 percent to 5.19, time-on-site has declined 2.0 percent to 4:44, and the bounce rate (only one pageview per visit) has increased 10.0 percent to 29.50 percent. None of these are good numbers, but the latter is the most alarming. Why aren't people staying on the page? There has to be a problem somewhere. That said, a bounce rate of 29.50 percent is still low, which is good.

Target's REDcard has been a success so far. A REDcard gives shoppers a 5.0 percent discount. Who wouldn't want that? In Q1 2012, 12 percent of Target transactions were made using a REDcard. In Q1 2013, 17 percent of transactions were made using a REDcard. While the 5.0 percent discount sounds like a negative, it's driving more traffic to the store. That said, how many times have you been to a Target and been made aware of a REDcard? If you're like most people, then this has never happened. Target would have more potential with the REDcard if it was more focused on exposure – without annoying shoppers.

For those who don't already know, Target is now selling wedding gowns. This is a very interesting play by Target. It might work, and it might not, but if it works, it has some serious potential. The reason for that is because the average expected price paid for a wedding gown this year will be $1,228, and Target wedding gowns begin at only $69.99. In an economy where the consumer is constantly looking for a bargain, there is potential in this space. The big concern is that most brides won't want to say they got their wedding gown from Target. Target will have to come up with a way to solve this problem.

In regards to valuation, Target is currently trading at 16 times earnings whereas Costco Wholesale Corporation (NASDAQ:COST) is trading at 24 times earnings and Wal-Mart is trading at 15 times earnings. Valuation isn't a factor at the moment. However, it should be noted that Target and Costco aren't as resilient as Wal-Mart in bear markets. For example, Target and Costco declined more than 45 percent in late 2008/early 2009 while Wal-Mart only declined about 20 percent.

Those looking for safety are likely looking for yield as well. Target currently yields 2.10 percent whereas Wal-Mart yields 2.50 percent and Costco yields 1.10 percent.

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The chart below takes a look at some basic fundamentals for Target, Wal-Mart, and Costco.

	TGT	WMT	COST
Trailing P/E	16.49	14.83	23.61
Forward P/E	12.88	12.93	21.58
Profit Margin	3.83%	3.62%	1.94%
ROE	17.29%	23.62%	17.30%
Operating Cash Flow	7.25B	25.05B	N/A
Dividend Yield	2.10%	2.50%	1.10%
Short Position	2.40%	1.70%	1.30%

Let's take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong

Target has been a steady performer for several years. It has underperformed its peers over a three-year time frame, but it’s doubtful that investors are crying.

	1 Month	Year-To-Date	1 Year	3 Year
TGT	0.03%	19.87%	24.63%	41.73%
WMT	-4.49%	11.65%	16.71%	60.92%
COST	-0.25%	11.18%	36.56%	115.7%

At $70.17, Target is trading above its averages.

50-Day SMA	69.86
200-Day SMA	65.17

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Target is close to the industry average of 0.70. It might not be as strong as peers, but it’s not a concern, either.

	Debt-To-Equity	Cash	Long-Term Debt
TGT	0.86	1.82B	14.21B
WMT	0.75	8.86B	57.08B
COST	0.46	6.51B	4.94B

E = Earnings Have Been Solid

Earnings and revenue have consistently improved on an annual basis. To see this type of consistency is somewhat rare and always a good sign.

Fiscal Year	2009	2010	2011	2012	2013
Revenue ($) in millions	64,948	65,357	67,390	69,865	73,301
Diluted EPS ($)	2.86	3.30	4.00	4.28	4.52

Looking at the last quarter on a year-over-year basis, revenue improved and earnings declined. Both earnings and revenue declined on a sequential basis. Earnings have been affected by investments that are likely to lead to increased revenue growth in the future.

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Quarter	Apr. 30, 2012	Jul. 31, 2012	Oct. 31, 2012	Jan. 31, 2013	Apr. 30, 2013
Revenue ($) in millions	16,537	16,451	16,929	22,726	16,706
Diluted EPS ($)	1.04	1.06	0.96	1.47	0.77

Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Target has been a long-term winner, and that's not likely to change. However, a significant hit to the stock price is possible if the market suffers a steep correction. The good news is that Target would most likely recover.