Target (TGT) has been a star performer; it has generated a total return of 433% since we added the stock to our portfolio in April 2017, recalls Jim Pearce, chief investment strategist at Investing Daily's Personal Finance.
Certainly, the coronavirus pandemic has accentuated the virtues of the measures taken by Target over the past five years to facilitate its online merchandising capabilities. Prior to the pandemic, Target had already begun the process of redesigning its stores to cater to its traditional in-store shoppers while making it easier for online shoppers to pick up their orders at a nearby store.
The fruit of that labor was evident in Target’s fiscal 2021 Q3 results released on November 17. During the quarter, Target increased its comparable sales by 12.7% on a YoY (year over year) basis. That is particularly impressive since the company increased last year’s Q3 sales by more than 20% over 2019.
That performance was driven by a 29% gain in digital comparable sales in addition to the 9.7% increase in comparable store sales. All five of Target’s primary merchandising categories experienced double-digit growth during the quarter. As a result, the company recorded a 51.6% jump in third quarter GAAP (generally accepted accounting principles) EPS (earnings per share).
Unlike many other stocks, TGT isn’t appreciating because its multiples to sales and earnings are expanding. It’s growing because it is racking up big gains in both of those categories. Despite appreciating 43% over the first eleven months of this year, Target is valued at a lower FPER (forward price-to-earnings ratio) and PEG (price/earnings-to-growth) ratio now than it was at the start of the year thanks to its strong operating metrics in 2021.
All of that begs the question; can Target continue to perform going forward as it has in the recent past? Five years ago, the presumption was that e-commerce giant Amazon (AMZN) would eventually put traditional bricks & mortar retailers such as Target out of business.
Now, it is Amazon that is tweaking its business model in response to Target’s hybrid approach to satisfying consumers’ desire for the ease of online shopping combined with the desire for instant gratification.
Long story short, I see nothing to suggest that Target has become overvalued. Despite its impressive operating metrics over the past several years, Target is still priced at a discount to the S&P 500 Index with respect to its FPER and price-to-sales ratio. In addition, Target’s board recently approved a new $15 billion share repurchase program that equates to roughly 12% of its total stock market value.
To be sure, owning shares of Target now is not the no-brainer decision it was a few years ago when the stock was clearly undervalued. However, the company has proven that it deserves a higher multiple to sales and earnings based on its ability to consistently deliver top-tier results. Target is a buy up to $260.
