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Valuation: Target Corporation (TGT) is Defensive and Fairly Valued

moneyCompany Profile (obtained from Google Finance): Target Corporation sells a range of assortment of general merchandise and food in its stores. The Company’s general merchandise and CityTarget stores offer a food assortment on a smaller scale and its SuperTarget stores offer a line of food items comparable to traditional supermarkets. The Company operates in three segments: U.S. Retail, U.S. Credit Card and Canadian. The Company’s U.S. Retail Segment includes all of its United States merchandising operations. The Company’s U.S. Credit Card Segment offers credit to qualified guests through its credit cards: the Target Credit Card and the Target Visa. Its Canadian Segment includes costs incurred in the United States and Canada related to its Canadian retail market entry. As of February 2, 2013, the Company had 1,778 stores in 49 states and the District of Columbia. It also owns three distribution centers in Canada, with a total of 3,963 thousand square feet.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $65
MG Opinion Fairly Valued
Value Based on 3% Growth $57
Value Based on 0% Growth $34
Market Implied Growth Rate 3.66%
Net Current Asset Value (NCAV) -$27.01
PEmg 15.81
Current Ratio 0.90
PB Ratio 2.45

Balance Sheet – 10/31/2013 

Current Assets $13,153,000,000
Current Liabilities $14,551,000,000
Total Debt $12,665,000,000
Total Assets $46,373,000,000
Intangible Assets $0
Total Liabilities $30,217,000,000
Outstanding Shares 631,760,000

Earnings Per Share – Diluted

2014 (estimate) $3.44
2013 $4.52
2012 $4.28
2011 $4.00
2010 $3.30
2009 $2.86
2008 $3.35
2007 $3.21
2006 $2.71
2005 $2.07
2004 $2.01
2003 $1.5

Earnings Per Share – Modern Graham 

2014 (estimate) $3.96
2013 $4.08
2012 $3.76
2011 $3.45
2010 $3.14
2009 $2.99

Conclusion:

Target Corporation is a strong company that passes almost all of the requirements of the Defensive Investor, having only failed the current ratio test.  By default, the company is also suitable for the Enterprising Investor.  The company is achieving consistent growth while going from an EPSmg (normalized earnings) of $2.99 in 2009 to an estimated $3.96 for 2014.  However, it should be noted that it appears the EPSmg may be dipping slightly in 2014 from its level in 2013.  Assuming this historical growth rate continues, the company seems to be fairly valued by the ModernGraham valuation model, as the market is currently implying a growth rate of 3.66%, which is in line with the historical growth.  As a result, Defensive Investors and Enterprising Investors should feel comfortable proceeding with further research to determine whether Target Corporation is suitable for their individual portfolios.

ModernGraham Valuations of related companies:

What do you think?  Do you agree that Target Corporation is fairly valued?  Is the company suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Target Corporation at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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