Key Takeaways:
- The 2-Minute Valuation Model values Target stock at $166/share in 2 years.
- This implies that the stock could have just over 20% upside from its current share price.
- However, Target struggles to define any clear competitive advantage, which adds considerable uncertainties to the business’s long-term prospects.
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Target stock has fallen over 40% over the past 3 years, reflecting the market’s concerns over its weakening position in the evolving retail landscape and its lack of a competitive moat.
Today, the stock looks undervalued.
However, the business has struggled to define its unique selling position in an increasingly competitive retail environment. Morningstar doesn’t assign Target a moat rating, which should be a big concern for investors when Target’s competing against wide-moat Amazon and Walmart.
We like Amazon today better than Target. Find the best stocks to buy today on TIKR! >>>
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is Target Undervalued?
Forecast
On Target’s Analyst Estimates tab shown below, you can see that analysts expect the company to grow revenue at a 3.5% compound annual growth rate, and normalized earnings per share, or EPS, are expected to grow a bit faster at 9.4% per year driven by margin expansion and some share buybacks:
View Target’s full analyst estimates >>>
For context, Target’s revenue grew at about 6.3% annually over the past 5 years, while EPS grew about 6.1% annually. That means that sales are expected to slow down slightly going forward, but Target will continue to benefit from increasing profit margins.
Valuation Multiple
Today, Target trades at around $136 per share, which means the stock trades at around 0.75 times next year’s expected revenue and 15 times next year’s expected earnings.
The stock has averaged a 17.7x forward P/E multiple over the past 5 years, so the stock looks a little cheap today.
Target looks to be trading at a cheap share price today. Still, the stock might struggle to perform well over the long term if it’s not a clear leader in its core markets or doesn’t have a strong competitive edge.
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We’ll use a 14x forward P/E ratio in our valuation to be conservative.
Fair Value
3 years from now, analysts estimate that Target could reach about $11.24 in normalized EPS. At a 14x NTM P/E multiple, that values Target stock in 2 years at $157/share. We can tack on an extra $9/share in dividends that Target is expected to pay to arrive at a final fair value of $166/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2-year valuation uses 3-year EPS forecast figures.)
With the stock trading at about $136 today, this implies that Target could rise 10.5% per year over the next 2 years, or 22% in total:
A 10.5% return is close to the market’s long-term average of about 10% per year.
However, with Target lacking an economic moat, it may be hard to justify investing in the stock today, as it doesn’t look like the business offers the competitive advantages needed to sustain above-average returns over time.
Analysts are more pessimistic on Target because they think the stock could trade flat over the next 2 years.
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Analysts’ Price Target
The consensus analyst price target for Target today is about $142 per share, which means analysts think the stock has nearly 5% upside.
The blue line below shows analysts’ estimated upside for Target stock over the past 5 years.
When the blue line was high, analysts thought Target stock was undervalued. When the blue line was low, analysts thought Target stock was overvalued.
The black line simply tracks Target’s stock price, which you can see hasn’t made much progress in the past 5 years.
Analysts’ estimates aren’t always spot-on, and Target is a prime example. For years, analysts projected the stock had around 10-20% upside, while Target stock climbed in 2021 and fell in 2022.
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, analysts think Target stock is just about fairly valued, which seems pretty reasonable today.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Target stock is just about fairly valued today, and it’s possible that the stock could go up 22% over the next 2 years.
This is, of course, just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
We like Amazon today better than Target. Find the best stocks to buy today on TIKR! >>>
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
