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Despite trading at historic highs, the stock has high revenue growth, expansion plans, decent dividend, and high margins, all of which make Target (NYSE:TGT) a buy. Lately, many large cap dividend stocks with strong cash flows have seen stretched valuations. However, Target is one dividend stock that is still trading at its historical P/E ratio.

Target (TGT)'s investment plans in Canada, and its operations in the U.S., are both expected to grow the company's top line in the future. Expected growth for the next five years stands at 12.1% per annum. Target is one the largest U.S.-based retailers. It has more than 1,700 stores in 49 states in the U.S. It operates in three segments, namely U.S. retail, U.S. credit card and Canadian. U.S. retail is the largest segment of the company, contributing more than 98% of total revenues; credit card contributes nearly 2% to total revenues. It also has an online presence that helps customers locate products in stores, and buying them online.

The company's performance has been strong in the recent past, despite a weak economic outlook, as people buy cheaper goods due to discount offers. The growth rate for the company has been nearly 10% per annum in the last five years, and TGT is expected to increase its earnings on average by 17% per annum from fiscal year 2014 till fiscal year 2016. Target reported second quarter revenues of $16.78 billion, up 3.3% YoY. The company has a history of beating earnings estimates. The company registered an earnings surprise of 5% in the recent second quarter. Adjusted EPS for the recent second quarter were $1.12, up 4.6% YoY. Earnings for the third quarter are expected to be in a range of $0.83-to-$0.93 per share. The company raised its full-year adjusted EPS guidance range to $4.65-$4.85 from $4.6-$4.8.

The August data reflects that the overall U.S. retail growth of 3.6% has been above expectations. Target Corp. marked a 4.2% sales growth on a comparable store sales basis in the month of August, which was at the high end of the expected range. The sales growth for August was associated with a strong back to school/college season, which is the second biggest sales season after winter holidays. A strong start to the third quarter gave investors confidence and indicated that consumer spending will be strong in the upcoming winter holiday season.

Target Corp. is expanding its operations in Canada through new store openings. Under its expansion plan in Canada, the company purchased leasehold interests from Zeller Inc for 189 sites. Expenditures for expansion in the Canadian market are leading lower earnings in recent quarters. It reduced EPS by ~9 cent in the second quarter. The company is expected to start generating profits by 2014 from its Canadian operations. Currently, the company is not generating revenues from the Canadian segment. The stores in Canada are expected to open in 2013.

Over the years, the company has maintained its high margins. And currently, its gross profit and operating margins are also above that of its competitors and the industry average.

Gross Profit Margin

Operating profit Margin

Dividend Yield

TGT

30%

7%

2.3%

Wal-Mart Stores Inc. (NYSE:WMT)

25%

6%

2.2%

Costco Wholesale Corporation (NASDAQ:COST)

12%

3%

1.3%

Source: Yahoofinance

In the second quarter, the company repurchased its shares worth $549 million. Over the years, the dividend yield has been on the rise. In the last five years, the dividend yield increased from 0.81% to 2.3%. Its current yield of 2.3% is above its average industry yield of 1.36%. In the first half of the current fiscal year, the company had $2.471 billion from cash flow from operations and paid dividends of $399 million. This indicates the company will be able to sustain its dividends in the future as well. Long term debt-to-equity is 95%, while interest coverage is 7x for the company.

There are a few factors that could hamper the company's future growth, and investors should keep an eye on these factors. The weak economic outlook and less-than-anticipated consumer spending can be a hurdle to future growth. Secondly, competition has been increasing in the industry; this will force players in the industry to lower their prices to successfully compete, which will mean lower profit margins.

P/E Forward

PEG

P/B

TGT

13.1x

1.2

2.6x

Wal-Mart Stores Inc.

13.8x

1.8

3.55x

Costco Wholesale Corporation

22.5x

2

3.45x

Average

18x

-

3.5x

Source: Reuters

TGT's stock seems to be attractive based on its lower multiples, as compared with its competitors. It PEG of 1.2 reflects cheap growth on offer, relative to its peers WMT and COST. Using the company's five-year historical P/E average 12.5x and estimated earnings for calendar years 2014 and 2015, we calculated price targets of $74 and $84, respectively.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.