By Eirik Nordgaard
Target (NYSE:TGT) is set to report its fourth-quarter financial results before the market opens on Wednesday (2/24). With more than 430 out of the S&P 500 companies done reporting, the spotlight is now on big retailers.
Earlier in the week, Macy's (NYSE:M) beat, while Wal-Mart (NYSE:WMT) missed on revenue estimates, so there is still no clear consensus on the state of big retailers. Retail sales are an important metric for our economy because the consumers drive about two-thirds of U.S Economic growth. This upcoming earnings report from Target will offer good clues on the general direction of big retailers for the years to come. Investors and analysts are looking to see whether brick-and-mortar stores are slowly shrinking as a result of a shift in consumer's preference towards e-commerce. Wall Street is anticipating Target to announce earnings of $1.54 per share and revenue of $21.75 billion for the quarter.
Target reported a huge loss on the concurrent quarter a year ago, which was related to discounting its Canadian operations. Tomorrow's report will start to show the effects of the downsizing and regrouping, and whether it is helping the company's performance yet. Investors are not only expecting to see that, but will also be looking for positive effects on earnings and on the balance sheet. Target's exit from Canada is already completed and its pharmacy handover to CVS is done.
Among other factors, Wal-Mart's disappointing earnings results were caused by strong headwinds in the foreign currency markets. As Target's retail stores now only operate within the U.S, foreign exchange headwinds will not have impacted the company's performance. This is positive.
The most important metric to pay attention to on Target's release of earnings will be same-store sales performance. Investors are looking to gain more information on the progress of its "omni-channel" capacity improvements.
Now let's take a look at how Target's financial ratios compare against the other major players in the big retail sector. We populated the SprinkleBit analyzer with Target's main industry peers to project how their financial fundamentals compare to Target's. Let's take a look at how Target compare against Costco (NASDAQ:COST), Sears (NASDAQ:SHLD), Dollar General (NYSE:DG), and J.C. Penney (NYSE:JCP). For this analysis, we used EBITDA multiples, revenue multiples, market cap to revenue, market cap to total assets and PE in order to see how Target measures up against its peers. We chose to leave Wal-Mart out of this comparison. The size of Wal-Mart in relation to these competitors skews the valuation, and we feel like we received a more accurate implied share price by leaving it out.
By running the fundamental measures in comparison to the competition, we received an implied share price of $86.94. With the current trading price of $73.98 (EOD 2/23), Target is undervalued by 17.52%.
We have also analyzed the technicals on the daily chart in order to see where the stock price could potentially move to. Target is not known to make big moves on the release of earnings, but neither is Macy's, and its stock moved as much as 5.7% after the company reported fourth-quarter results that exceeded expectations. We, therefore, think it is reasonable to believe that Target also has the potential to make an earnings move outside its normal range.
With an entry price of $73.99 and a reported loss on earnings, the stock has the potential to fall to $69.00 for a 6.76% loss.
With an entry price of $73.99 and a reported beat on earnings, the stock has the potential to rise to $78.60 for a 6.23% gain.
The risk/reward ratio for this trade is 0.92.