By Geoffrey Seiler, BullMarket.com

Target (TGT), a 'buy' on our recommended list, just delivered a stronger-than-expect​ed third-quarter profit; gains were driven by solid sales in higher-margin categories like is signature apparel lines and home goods.

The credit card unit also performed well as the penetration of the company's REDcard rewards credit card, which gives cardholders a 5% discount on purchases, rose to 9.5% from 5.5%.

Target reported net income of $555 million for its fiscal Q3 2012 ended October 29th, equal to 82 cents per share. Its profit was up 3.7% from $535 million, or 74 cents per share, in Q3 2011.

Excluding items such as a one-time tax benefit and costs associated with its expansion into Canada, the company's profit was 87 cents per share, or 13 cents better than the Wall Street consensus estimate.

Target's total revenue grew by 5.1% to $16.4 billion, which also topped the analyst consensus estimate of $16.28 billion. Sales on a same-store basis grew by 4.3% during the quarter.

Overall, Target delivered the kind of solid results we would expect to see during the middle innings of a slow recovery.

It has not followed the same approach as Wal-Mart (WMT). While its rival is focused on maintaining its image as a low-price leader by absorbing commodity cost increases, Target  continues to differentiate itself through its merchandise assortment and overall value proposition, as befits its "expect more, pay less" tag line.

It signed several deals with notable designers such as Jason Wu to develop affordable fashions and accessories for women. We would expect those efforts to translate into respectable sales this holiday season.

Overall, we continue to like the direction Target is headed. The REDcard 5% rewards program is clearly a winner in terms of driving traffic and incremental sales as Target's best customers continue to embrace it.

Target opened six new stores to complete its 2011 new-store program and remodeled 133 existing locations during the quarter. It now has 875 general merchandise locations with expanded food sections that include fresh groceries.

It will continue to remodel existing stores and next year plans to open its first City Target locations. The City Target stores are smaller format concepts geared to urban locations.

Target expects to open 125 to 135 stores in Canada in early 2013. The foray into Canada should provide a pathway to solid long-term growth, though the costs associated with the expansion will cut into profits next year.

Looking ahead, Target guided for Q4 reported EPS to range from $1.43 to $1.53 per share, which brackets the $1.48 per share consensus.

The forecast excludes the impact of any potential sale of its credit card receivables and the resolution of certain state tax appeals that Target estimates could save the company around $50 million if it gets a favorable ruling.

Target has projected it can earn more than $8 per share in the next six to seven years, which looks achievable and makes the stock look like a bargain at current levels.

Trading at a bit over 12x the 2013 consensus (FY ending January 2013), we rate the stock a "Buy" with a target price of $64.

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