This Stock Is On Sale If We Don’t Sink Into A Recession

We all know that tech has fallen out of favor. Companies that are not profitable are getting hammered. 

But some of the most profitable companies in the world are also seeing their share price shredded. 

For example, Target (TGT) is down over 35% YTD on fears that consumer spending is getting weaker. 

In the last two weeks, we’ve seen search volume for discount retailers soar amongst financial pros and retail as many of these names plunged.

Heck, Walmart lost more than 20% of its value in three days

But what if all of this is just temporary. 

Can these companies climb back?

While each of these companies presents a different value, Target had an unusually high search volume in the last week.

So, we decided to take a peek under the hood.

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Details here…

Target Corporation (TGT) Business

Often considered more upscale to Walmart, TGT operates general retail goods stores across the country. The company offers food assortments, including perishables, dry grocery, dairy, and frozen food items.  

Additionally, TGT stores sell apparel, accessories, home decor products, electronics, toys, seasonal offerings, and other merchandise, and beauty and household essentials. 

Beyond the physical stores, TGT  has a strong digital presence, going direct-to-consumer via its Target.com website. 

There are over 1,931 Target stores in the United States.

During its Q1 2022 earnings results, TGT reported store comparable sales increased 3.4%, on top of 18.0% growth last year.  Digital comparable sales grew 3.2%, following a growth of 50.2% last year. 

The latest quarterly report stunned analysts when management reported a 52% drop in profit. Results missed non-GAAP EPS expectations of $2.19 by $0.87.

Despite topline sales growth of 4%, the company faced supply chain disruptions and inventory mismanagement on top of inflationary pressures.

Financials

TGT has a gross profit margin (TTM) of 28.3%, which is considerably worse than the sector median of 36.18%. However, that dropped down to 26.65% in the latest quarter, the worst in years.

The firm’s revenue growth (YoY) stood at 9.0%, which is significantly weaker than the sector median of 24.41%. However, the 10-year average growth for the company is 4.26%, nearly double Walmart’s.

In 2021 TGT had a current ratio of 0.99x, which means its assets are not enough to cover its short-term liabilities.  

Furthermore, TGT in 2021 had a quick ratio of 0.33x, which means its highly liquid assets are not enough to cover its short-term liabilities. This is a concern as free cash flow wavers.

The capital structure for TGT is as follows: total debt of $17.32 billion and cash upwards of $1.1 billion, and a market cap of approximately $72.04 billion. 

In Q1 2022, TGT reported its operating margin rate at 5.3%, blaming excess inventory, as well as, higher freight and transportation costs. 

Despite these issues, TGT does offer its shareholders a dividend of $3.60 per share. Which at its current stock price, is approximately 2.4%.

Valuation

TGT has a P/E GAAP ratio of 12.71x, which is not too far off of the sector median at 11.76x. And the price to forward cash flow of 8.76x is fairly attractive, yet not any better than the sector average.

One impressive number that TGT boasts is its cash from operations, which stands at $6.09 billion, compared to the sector median of $162 million. 

Still, the company’s price-to-sales ratio of 0.65x is slightly better than the sector median of 0.87x.

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Our Opinion – 6/10

TGT is one of the great retail stores still left in America. It’s third in market cap only to Costco (COST), and Walmart (WMT). 

However, it is dealing with higher energy costs and the threat of an economic recession around the corner. 

But with shares down 35% YTD, now might be a chance to nibble at some shares. 

Yet, it has a heavy debt load with uneven cash flows. In order for us to like this stock, we’d prefer a rosier outlook or larger discount to the sector.