Why Investors Are Cautious Over Target

Feb.26.14 | About: Target Corporation (TGT)

Target Corp. (NYSE:TGT) is set to report FQ4 2014 earnings after the market closes on Wednesday, February 26th. Target is the second largest discount retailer in the United States, sitting behind only Wal-Mart (NYSE:WMT) in terms of size. This quarter retail sales have been down across the board and most companies have blamed harsh weather for reduced customer traffic. Additionally, in December Target confirmed it had been the target of one of the biggest credit card hacks in the history of retail shopping. TGT announced that up to 40 million shoppers from late November and early December may have had their credit or debit card information compromised. In the age of NSA revelations and cyber security concerns, the hacking scandal could have a big impact on consumer confidence and adversely affect Target's Q4 sales. Here's what investors are expecting Target to report Wednesday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.image

(Click Here to see All Estimates for Target)

The current Wall Street consensus expectation is for TGT to report 82c EPS and $21.540B revenue while the current Estimize.com consensus from 16 Buy Side and Independent contributing analysts is 92c EPS and $21.504B revenue. This quarter, the buy-side -- as represented by the Estimize.com community -- is expecting Target to beat the Wall Street consensus on EPS by a significant margin but fail to meet Wall Street expectations on sales.

By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors, Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market's actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a large differential on EPS, but a small one for revenue.image

The distribution of estimates published by analysts on the Estimize.com platform range from 76c to $1.22 EPS and $20.852B to $22.000B in revenues. This quarter we're seeing a large distribution of estimates for Target.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of EPS estimates signals less agreement in the market, which could mean greater volatility post earnings.image

Over the past 4 months Wall Street reduced its EPS consensus from $1.44 to 82c while the Estimize community lowered its expectations from $1.12 to 92c. Over the same period of time, the Wall Street revenue consensus dropped from $22.619B to $21.540B while the Estimize consensus fell from $21.813B to $21.504B. Timeliness is correlated with accuracy and downward analyst revisions going into a report are often a bearish indicator.image

The analyst with the highest estimate confidence rating this quarter is triker, who projects 80c EPS and $21.450B in revenue. In the Winter 2014 season triker is rated as the 65th best analyst and is ranked 129th overall among over 3,900 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case triker is expecting Target to miss the Estimize community consensus on both the top and bottom line.

This quarter contributing analysts on the Estimize.com platform are expecting Target to miss Wall Street's revenue expectation by $36 million but exceed on EPS by 10c per share. This quarter the Estimize community expects Target's revenue to drop by 5% compared to last year. Security concerns and poor retail sales across the board due to the inclement weather are likely reasons for the cautious revenue expectations this quarter.

Disclosure: No positions