Inside Wall Street: Target headed for $100 a share?

The giant discount retailer gains increasing ground among both bargain-hunters and upscale shoppers looking for value buys.

By Gene Marcial Aug 14, 2012 12:40PM

Justin Sullivan/Getty ImagesTarget (TGT) is fast becoming a retailer for all seasons -- and all types of shoppers.


Investors are catching on. Wall Street has started to regard the retailing giant as one of the few long-haul growth plays in the fiercely competitive industry.

 

No longer is the rapidly expanding company trying to beat just Wal-Mart (WMT) at the discounting game. It is evolving into something akin to a Neiman Marcus with lower prices.

 

In fact, Target is teaming up with Neiman Marcus for the coming holiday season to sell limited-edition collections by 24 high-end fashion designers in its 1,763 stores and on Target.com.

 

Shares of Target are rising steadily, reaching $63.17 on Tuesday, passing the 52-week high of $63 -- and way up from $48.96 on Jan. 9, 2012.

 

But don't think the stock is anywhere near its peak. Some pros forecast it will rocket to $100 a share over the next five years, based on some estimates that Target's earnings will almost double in 2017, to $8 a share, on projected revenue of $100 billion -- yes, $100 billion. This year, Target is expected to make $4.30 a share on estimated revenue of $72.44 billion.

 

"The company has provided detail on how it plans to reach its long-term objectives of $100 billion in revenues and $8 in earnings per share by 2017," says Robert Drbul, an equity analyst at Barclays Capital, who rates the stock as "outperform." "We believe Target benefits from a strong franchise and solid customer loyalty," he explains, as well as from its long-term growth objectives.

 

For 2013, Drbul figures Target's profits will rise to $4.85 a share on sales of $76.44 billion, and leap to $5.50 in 2014 on $82.74 billion. "The company continues to track well on its way to (earning) $8 a share by 2017," says Drbul, who believes Target "should continue to attract needs-based shoppers." 

 

The core customers of Target are middle- and upper-income consumers who appreciate the discount store's broad assortment of fashion apparel, home furnishings, household products, electronics and other competitively priced general merchandise.

 

The supersized Super Target stores carry groceries, which have contributed to the store's overall appeal to shoppers. And Target.com offers an even broader line of products, some of which aren't found in Target stores.


Target offers credit to qualified customers through its REDcard. The retailer has also considered selling part of its credit card operations, which brought in $1.4 billion in revenue last year. But the bulk of Target's growth comes the old-fashioned way -- through the opening of new stores and rising same-store sales. It opened 13 new stores and remodeled 400 older stores last fiscal year. For fiscal 2013, Target plans to open as many as 20 stores and remodel 230.

 

The strong sales comparisons in July exceeded analysts' expectations, largely driven by increased traffic rather than the usual price-cut promotions. Food was again the strongest category boosting overall sales.

 

Target's lower-ticket retail items, like apparel and home products, provide attractive leverage points during a recovery in discretionary spending.            

 

"Target remains a top long-term idea due to attractive valuation (with its stock at 14 times depressed estimated fiscal 2013 earnings), powerful top-line drivers, and prospects for accelerated earnings-per-share growth in fiscal 201 and 2014," says Peter Benedict, an analyst at the investment firm Robert W. Baird. The Canadian market, where operations are turning profitable, is contributing to better results, he says.

 

There's no denying that a slow and uneven economic recovery in the U.S. is affecting sales. But "faster same-store sales growth in fiscal 2013, supported by higher traffic the company is seeking in new and remodeled 'PFresh' stores," which offer groceries, should offset the impact of the economic slowdown, says Ian Gordon, an equity analyst at S&P Capital IQ.

 

A bull on Target, Gordon rates the stock a "strong buy," with a 12-month price goal of $72 a share. To many investors, Target is also considered a dividend play, as it provides a comfortable payout yield of 2.31%.

 

Gordon expects investors will soon ascribe more value to Target's entry into the Canadian market. And with its initial success there, the company's next target may well be other foreign locations -- although saturation of the huge U.S. market remains a part of the company's long-term-growth goal.

 


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.          

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