Target Corp (TGT, Financial), a prominent player in the retail sector, experienced a daily loss of 3.03% and a 3-month loss of 9.96%. Despite these figures, the company's Earnings Per Share (EPS) stand at 7.28. The question is, is the stock significantly undervalued? This article aims to provide an in-depth analysis of Target's valuation, encouraging readers to delve into the subsequent sections for a comprehensive understanding.
Company Overview
Target Corp, the nation's sixth-largest retailer, is known for its wide product assortment and a gratifying in-store shopping experience. The company's upscale image, trendy apparel, home goods, and household essentials at competitive prices have won the hearts of many since the 1990s. Today, Target operates over 1,900 stores in the United States, generating over $100 billion in sales and fulfilling over 2 billion customer orders annually.
Despite the impressive figures, the company's stock price stands at $119.32, significantly below the GF Value of $227.8. This disparity prompts a deeper investigation into the company's intrinsic value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. This measure considers historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If a stock's price is significantly above the GF Value Line, it is considered overvalued, indicating poor future returns. Conversely, if it is significantly below the GF Value Line, the stock is potentially undervalued, promising higher future returns.
According to GuruFocus' valuation method, Target's stock appears significantly undervalued. This conclusion is drawn from the stock's current price of $119.32 per share, which is well below its GF Value. Therefore, the long-term return of Target's stock is likely to be much higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, reviewing a company's financial health before investing in its stock is critical. Starting with the cash-to-debt ratio and interest coverage can provide an understanding of the company's financial strength. Target's cash-to-debt ratio of 0.09 is worse than 80.72% of 306 companies in the Retail - Defensive industry. However, GuruFocus ranks Target's overall financial strength at 6 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Companies with high profit margins are usually safer investments than those with low profit margins. Target has been profitable for 9 of the past 10 years and has an operating margin of 4.36%, ranking better than 64.38% of 306 companies in the Retail - Defensive industry. Overall, Target's profitability is ranked 8 out of 10, indicating strong profitability.
Growth is one of the most important factors in a company's valuation. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Target is 15.7%, ranking better than 83.45% of 290 companies in the Retail - Defensive industry. However, its 3-year average EBITDA growth is 0.2%, which ranks worse than 74.42% of 258 companies in the same industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is another way to assess its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Target's ROIC has been 10.05, and its WACC has been 8.63.
Conclusion
In conclusion, Target's stock appears to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks lower than 74.42% of 258 companies in the Retail - Defensive industry. To learn more about Target's stock, check out its 30-Year Financials here.
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