Is Target A Buy After It “Crushes” Earnings?

Back In August I showed you 3 Reasons To Avoid Target to protect your retirement portfolio…

Today, I answer the question – Is Target A Buy After It “Crushes” Earnings?

Below is a brief recap of what I said in August about avoiding its stock.  If you want to read the previous article in full, use the link above.

3 Reasons To Avoid Target

  1. It’s Got A Lot Of Debt

As a percentage of its balance sheet, Target (TGT) has a lot of debt….

In most recent quarter its balance sheet is made up of 75.1% of total liabilities.  And its debt to equity ratio is 1.46.

I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term.  This helps insure I lose as little money as possible over time.

Typically, this means I invest in companies that have little to no debt compared to their cash and equity… And usually this means I want to invest in stocks that have a debt to equity ratio below 1.

If you’ve seen some of our previous articles, I’ve shown you stocks that have debt to equity ratios and liabilities as a percentage of their balance sheets that are far higher than Targets.

Yes, if you look at any of those articles the stocks all have much higher debt ratios than Target does… But a company doesn’t have to have horrific debt numbers to make me uncomfortable investing in something.

Target’s debt levels are too high for my liking… Even though they aren’t horrific.

But there’s another reason to stay away from its stock.

2. It’s Not Producing Enough Profits and Cash Flow

In the last 12 months Target produces subpar operating profits.  Is unprofitable on a net income basis.  And it produces just above average free cash flow.

These all due mainly to increased costs related to the coronavirus and increased competition from Walmart, Amazon, and others in recent months and years.

In the trailing twelve months (TTM) period its operating profit margin was 5%.

Its net income profitability margin in the period was negative 0.6%.

And its free cash flow to sales (FCF/Sales) margin in this same time was 6.2%.

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.

And I look for stocks FCF/sales margins above 5% on a consistent basis.

When a company surpasses these thresholds, it means the company is a great operating business.

And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.

Target is a good operating business but its seeing lower profits because of the coronavirus and increased competition.

In time, this leads the company to have less money to reinvest in the business to continue competing well.

And this could cause Target to lose its competitive advantages over time.

Again, is this a massive negative deal now? No, it isn’t.

But I want to only recommend the best of the best to you.

And there’s still one more reason to avoid Target’s stock in the coming months.

3. Its Overvalued

As of this writing Target is overvalued…

Its P/E is 22.2.

Its P/CF is 8.3.

And its forward P/E is 29.9.

On all these metrics I look to buy investments below 20 to consider them for investment.

Target is above these numbers on 2 out of 3 metrics which means its overvalued.

And this means investing in its stock today gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning its stock in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

None of this means I think Target will crash and burn…

I don’t.

I think it will continue performing well and increasing its dividend payouts to remain a solid Dividend King.

But due to the reasons above there is little to no margin of safety right now investing in its stock… And this makes it riskier.

Because of this I recommend you stay away from Target stock… Even though I expect it to continue doing well during this Pandemic.  

***

This thesis to avoid Target continued to play out after it released its latest quarterly earnings on November 18th, 2020 – sort of.

Comparable sales grew 20.7% in the year to year quarterly period.

Average ticket price grew 15.6% in the year to year quarterly period.

And because of these things, earnings per share grew 46.3% in the year to year quarterly period to $2.01 per share.

These are all fantastic results that have continued driving Target’s share price higher.

Its stock increased from $153.24 per share when I last wrote you about Target to $172.16 today… Or an increase of 12.4% in 3 months.

So, was I wrong about Target?

No.

Its still got too much debt for my liking.  And its margins are still too low as well.

Plus, because of its rise in share price it’s still overvalued.

Its P/E is 24.2.

Its P/CF is 9.

And its forward P/E is 21.1.

All this makes its stock about as risky now as it was in August.

For these reasons – and the ones in the previous article – continue avoiding Target… Even though we’re heading into the holiday season which will further boost its results and its stock.

Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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