Ackman 'Targets' Value, Just Like When He Was at McDonald's

Whether Bill Ackman plan to move Target's (TGT) real estate portfolio into a REIT structure succeeds or not, it's a stock with high intrinsic value that could trade much higher than it does today.

The retailer would own its stores on 75-year ground leases under Ackman's plan, and a spun-off real estate investment trust would own the land. He claims that the share prices of the two entities could double, with lower taxes helping to increase cash flow.

His strategy, announced Thursday, is very similar to the one he suggested to McDonald's (MCD) back in late 2005. At the time, Ackman said the hamburger chain's shares were cheap and it should spin off company-owned stores into a REIT.

Ackman valued McDonald's real estate near $50 bln, and said the company should spin off 65% of its 9,000-unit corporate restaurant operations division into a separate corporation. The company then in turn would sell $14.7 billion in mortgage-backed securities on its properties to refinance its current $5 billion in debt and buy back more than 300 million shares at $40 a piece.

His desire to pressure McDonald's ultimately failed, but he was looking at it for all the right reasons. Investors who bought right after his initial proposal was made public made a significant return on their money. Shares of MCD were trading in the mid $30s when he unveiled his plan, and currently trade hands near $60.

Target is similarly beaten down asset. Its trailing, forward and PE/G ratios are trading at or near their 5 year lows. It trades at just 73% of its Thomson Reuters Starmine intrinsic value estimate, based on future expected earnings -- lower on that measure than almost all its peers, including Wal-Mart (WMT), JC Penney (JCP) and Kohl's (KSS).

Shareholders don't like Ackman's plan. The stock sunk about 6% in Thursday's trading, as the Street worried that a REIT spinoff could hurt profit margins. Target's credit rating likely would be hurt, and it would raise the company's cost of capital.

Remember, however, that Ackman's McDonald's plan was never enacted.

What he did succeed in doing is to put pressure on Mickey Ds to unlock shareholder value in a cheap stock that should be trading higher.

He's likely to do that at Target, as well, which is why it's a buy with a stop at the Oct. 10 lows.

Stock position: None.