Thanks to heightened media coverage and major exposure from the Presidential election, it looks like the average American more fully understands what the Fiscal Cliff is all about. It also appears that the combination of a rapidly approaching deadline to find a resolution and the increased awareness of this issue has many consumers scaling back on holiday buys. A recent Fortune.com article sums up the views of one important business leader on the impact of this issue on the all-important holiday shopping season; it states:
On Tuesday night at the Council of Foreign Relations in New York City, Wal-Mart CEO Mike Duke offered a snapshot. Increasingly, Americans are following debates in Congress over tax and spending policies, he said. And a portion say it could drag their holiday spending, which retailers like Wal-Mart bank on for a chunk of their annual revenue.
If consumers are already pulling back now, that could indicate gloom and doom for the holiday season for many retailers. Weak revenue at this time of year is something few retailers can afford to absorb and it could knock the share prices lower. However, major retailers like Wal-Mart (WMT) and Target (TGT) are better-positioned thanks to strong balance sheets and a product line that includes many basic needs items. If the Wal-Mart CEO's comments are a harbinger of what's to come, retail stocks might be pushed even lower and that could bring a solid buying opportunity in these two industry leaders. Here's a closer look at Target and Wal-Mart:
Target Corp. shares have been under pressure recently and this company already seems to be seeing a slowdown in sales. It recently reported that November same-stores sales fell by about 1%. This was a disappointment for some analysts who expected that sales would be up about 2%. The weaker-than-expected sales in November could be a sign of a poor holiday season for retailers, especially since many consumers start holiday shopping during the last several days of November. Target shares might continue to come under pressure if December revenue comes in light, but if that happens and if it causes a decline in the share price, longer-term investors should consider it as a buying opportunity. Target's business model is well-suited for value-conscious consumers and it can remain relatively strong even if the economy weakens. It can also continue to provide investors with a solid yield of about 2.3%. More important than the current yield is the fact that management plans to boost the dividend to $3 per share by 2017. That is only about four years away, and investors who buy shares now at about $60 could be looking at a yield of around 5%, if the company reaches its goals for a $3 dividend in 2017. So, while the holiday season might come in weak, investors with a multi-year view should look past the Fiscal Cliff concerns and holiday sales by instead focusing on the long-term upside that Target could offer through dividends and capital gains. Analysts at UBS have set a $71 price target on the shares, which could give investors much more than just solid dividends.
Here are some key points for TGT:
Current share price: $60.54
The 52-week range is $47.25 to $65.80
Earnings estimates for 2013: $4.42
Earnings estimates for 2014: $4.89
Annual dividend: $1.44 per share, which yields about 2.3%
Wal-Mart Stores Inc. offers value shopping on a wide variety of consumer goods and even food throughout the United States. It has a solid balance sheet with about $8.64 billion in cash and around $57.9 billion in debt. It also offers a similar dividend to Target, which currently yields about 2.2%. This stock was trading around $77 per share in October, but has since dropped to about $68. Some weak holiday sales expectations might be already priced-in, however, the stock could be heading to around $67 before finding more support, which is near the 200-day moving average. While Wal-Mart is a formidable retailing force, there could be some headline risks lingering from an alleged bribery scandal related to store openings in Mexico. Investors who want to avoid that potential issue should consider Target shares.
Here are some key points for WMT:
Current share price: $68.94
The 52-week range is $57.18 to $77.60
Earnings estimates for 2013: $4.92
Earnings estimates for 2014: $5.38
Annual dividend: $1.59 per share, which yields about 2.2%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.