Wednesday, February 19, 2014

Taking Aim on Target (TGT: $56)

“Current Valuation should attract dividend growth investors”
The “data breach” story broke in January causing both Target shoppers and stockholders to react.  One thing is certain:  the full story on what happened and who has been harmed is not written.  Current estimates on the cost of Target data breach for banks has eclipsed $200 million (AP 2/18/14).  Worse, conventional wisdom suggests that almost one third of all Americans were impacted.
Target’s CEO has attacked the problem head-on and has committed all resources necessary to fix the weaknesses in their data systems.  He has asked for extensive disclosure and has approached the crisis transparently.  Some are critical of their early responses.  However, we are staking out a position that IT Security at Target is much improved and sense that shoppers are slowly returning to the stores.  Investors should reconsider as well.  And from our vantage, there are three reasons why:
·         Valuation metrics

·         Dividend Character

·         Fundamentals

TGT shares have fallen from $64 to a $56 price level today (-12.5% YTD).  Key valuation metrics read like this (source:  Schwab)--

·         Forward Price Earnings ratio of 17.6 times based on a $3.10 estimate for 2014.  This compares to a forward PE of 18.5 times for the SP500 (“market’).

·         Price/Tangible Book (MRQ) of 2.21 versus 2.75 for the market.

·         Price/Cash Flow of 6.9 versus 14.6 for the market.

·         Price/Sales of 0.48 compared to 0.51 for Walmart and 1.57 for TJX
TGT Management has demonstrated a strong commitment to paying and growing the stock’s dividend.  For us, this dividend growth character is important and will carry into the future.  To give you a sense of things, the annual dividend rate per share and other statistics have tracked as follows (source: Schwab)--
2006                $0.44              
2007                $0.52               18% increase YOY
2008                $0.60               15%
2009                $0.66               10%
2010                $0.84               27%
2011                $1.10               31%
2012                $1.32               20%
2013                $1.58               20%

2014                $1.86               18% Walrus estimate

Payout ratio (TTM)                            43.4%
Dividend Coverage Ratio (TTM)       230.3%
5 year growth rate                            27.2%
10 year growth rate                          19.1%

Fundamentally, the market has discounted recent events and 2014 consensus projections have incorporated the potential impact to both revenues and earnings this year.  Importantly, this breach event was not isolated and the TGT response is not exclusive.  Other CEO’s have followed up with their own preventative measures and the retail sector is experiencing a moment reminiscent of the “Y2K” period.
The company should generated profits near the consensus view of $3 plus this year.  Their long term goal of $8 per share EPS is still the target (as they say).  Whether they hit this target or only come close, investors should be the ultimate winners.  We have stepped up and bought the stock yesterday and will add more on any price weakness.  

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