Earlier this week I wrote an article for Seeking Alpha discussing my interest in investing in Target Corporation (NYSE:TGT). I laid out my valuation for the company. Looked at some typical metrics. Commented on the growth in revenue per share, book value, and dividends over the past 10 years. I expected some feedback and a lively discussion on Target Corporation's financials. What I didn't expect was all of the comments concerning Target's credit card security breach in December. Some people nicely told me I had overlooked the breach as part of my opinion article and the valuation of Target Corporation's stock. Others, well let's just not repeat what they said...but I was floored.
Yes, I was aware of the security breach. I was also aware of Target's rather haphazard Canadian expansion, which doesn't look to be going so great right now. I have exactly zero(0), absolutely no concern about Target's long term well being as a result of the security breach however. It seems to me that Target is in a better position to address a PR situation like this than several of the other corporate "scandals" I mention below. By the way, that's exactly what I think the security breach is too, a PR situation.
Ever since people formed companies to start buying or selling goods, problems have arisen periodically. Maybe a ship sunk or a warehouse burnt down and the investors lost some portion of their capital. Investing is ripe with risk, but I'm sure most all readers of Seeking Alpha would acknowledge that. The thing about risk is that it comes in different forms. Fixed rate investors are exposed to interest rate risk. There are known risks, of which I contend this Target issue now qualifies. There are also unknown risks. I'll tell you that unknown risks are the ones that concern me. Unknown risks are by their very nature "unknown" and therefore unexpected. Given all the news coverage over the security breach, I believe that risk is thoroughly baked into the price of shares of Target stock. You must live under a rock, or don't have a Target anywhere near you, to not know about the security breach at this point. Here's the really interesting thing, I don't think most customers will alter their shopping habits going forward.
It's just my guess, but I believe a very small percentage of Target's current customer base will stop shopping at its stores as a result of the "scandal". Apparently, based on the comments on my previous article, some of the commenters have stopped shopping at Target...I however am guessing they are the vocal minority.
I channeled my inner Peter Lynch a couple weeks ago and took a small sample survey of people I know, concerning their thoughts on the security breach at Target. Now granted this wasn't a double blind medical research study, with a sample size in the tens of thousands, but I think the results speak for themselves. I asked twelve Target shoppers I know, if they will continue to buy from Target stores on a regular basis. The results were unanimous. Not a single person said they would stop shopping at Target stores as a result of the security breach. Several even mentioned that Target wasn't the only store to be victimized by the same hackers. A very good point. Ever since receiving comments on my previous article by former Target shoppers I will continue to sample people I actually know, until such time as I find someone who actually stopped shopping at Target.
The fact of the matter is that fraud and data risk are a very real problem in this computerized and interconnected world. I'm far more concerned about identity theft than I am about my credit card number being stolen. I have had erroneous charges before. I'm sure most people have. The thing is, they didn't cost me a thing. A quick phone call from the card company to say some transaction got flagged, writing an email confirming that I didn't purchase German skis and mail them to Kenya, and it was settled. They watched my account and I didn't have another problem. Actually, my charges we far more benign, but my family really did get a call about purchasing $20k worth of German ski equipment and electronics and shipping them to Africa. Anyway, the point is it didn't cost me a nickel.
Now that we have thoroughly discussed customers' personal risks, how about we talk about the risk to Target (and its shareholders). As I mentioned earlier, many corporations have endured scandals in the past. Some have gone bankrupt, but many more have continued to prosper after a couple quarters of reduced profitability. On a relative basis the recent security breach wasn't even that big of a deal. Sure Target's management could have been more up front about things, but ultimately I think the impairment to capital will be fairly small.
Why do I say this isn't a huge deal, on a relative basis? Let's look at some major scandals from the past 50 years. First up we have the American Express Salad Oil (or Soybean Oil if you prefer) scandal of 1963. This is very well documented so I won't rehash it, but the fact of the matter is American Express was scammed and lost some money. Years later 1963 just looks like a blip on the stock chart, as profits and stock prices more than recovered. As I recall a certain Warren Buffett made a small fortune by buying American Express stock after the scandal broke.
How about the Tylenol poisonings of 1982? Seven people actually died, as a result of taking a common product that was in the medicine cabinet of most homes. So what happened? McNeil Consumer Healthcare, a subsidiary of Johnson & Johnson (NYSE:JNJ), recalled their product and offered a reward for the person responsible for the poisoning. It was bumpy at the time, but Johnson & Johnson continued on to grow and prosper for the past 32 years. Heck, I'll even bet most of you have a bottle of Tylenol in your medicine cabinet at home.
What about all of the airplane crashes in the past 50 years? Scores of people have died in the various incidents on American aircraft. I do know a few people who now refuse to fly, but most people consider air travel an acceptable risk. While I wouldn't typically consider commercial airlines a great industry to invest in, customers are continuing to climb on planes and jet around the world.
How about something more recent? The 2010 Gulf Oil Spill perhaps? Now here was a disaster on a massive scale. Some rig workers actually died and oil was spread across hundreds of miles of the Gulf of Mexico. I live in Florida and do actually know people that won't buy BP gas as a result of the spill. Remember also that BP (NYSE:BP), along with Transocean (NYSE:RIG) and Halliburton (NYSE:HAL), were found to be cutting corners on safety procedures prior to the disaster. Additionally, BP was reprimanded for their actions during the clean up. Still, in spite of all of this, the disaster is largely behind the three companies. They are profitable and their shareholders have been rewarded with higher share prices.
I guess what I'm trying to offer in this article are my thoughts and perspective on Target's security breach. If the scandals and disasters mentioned above didn't destroy those corporations, I think it's highly unlikely that a growing company with a history of innovation, like Target, will be bankrupted as a result of this security breach. People actually died in some of those scandals and disasters discussed above. They died. Now if you're on a jury hearing a lawsuit in court, are you going to be more sympathetic toward credit card theft victims or the orphaned children of deceased folks? How about in the news media? The news papers love to splash huge headline about scandals and disasters, it sells papers, but remember many of the best investments are made at times of "maximum pessimism".
I am long JNJ. I do not currently own TGT, but I may initiate a position in the stock in the next few days. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional.