Consider this the third installment in my price target hikes for Target (NYSE: TGT ) stock.
In late November 2017, with TGT stock trading around $55, I said that the stock deserved to trade above $60 . Then, in April 2018, I said that TGT stock deserved to trade above $70, given recent operational improvements.
Now, in August 2018, I think that TGT stock deserves to trade above $80, thanks to a trio of tailwinds from digital sales, private labels, and store remodels. Granted, the stock is already above $80, so I don't necessarily see big upside from here. Instead, I think that TGT stock can hold gains into the end of the year, and then appreciate healthily thereafter - thanks to big digital sales growth and margin stabilization.
From that perspective, TGT stock isn't a screaming "Buy" or "Sell" here. Instead, it is simply a "Hold" for the rest of 2018.
Here's a deeper look.
The Target Rebound Has Been Impressive
In 2017, Target was getting its butt kicked by Walmart (NYSE: WMT ). Namely, Walmart was light years ahead of Target on the e-commerce and same-day delivery fronts, and Target was too busy dealing with PR issues to really do anything about it. As such, WMT stock zoomed higher for most of 2017, while TGT stock dropped.
But, that trend reversed course sharply in late 2017. By then, Target had shaken off bad PR and was punching back against Walmart. The company started investing big into things like e-commerce, store models, private labels and delivery capability. The sum of these investments drove huge holiday 2017 sales and traffic growth, and TGT stock popped.
Target hasn't looked back since. First-quarter numbers were more of the same, with decade-high 3.7% traffic growth to go alongside 25%-plus digital sales growth. Consequently, TGT stock has remained in rally mode ever since holiday 2017.
Operational Tailwinds Are Gaining Momentum
Multiple data points suggest that Target's operational strength has only improved over the past several months.
The company rolled out same-day delivery capability to multiple Midwest states in May, and to New York City in July. Enhanced delivery capability is a big part of Target's e-commerce growth strategy, so increased availability of this service has likely boosted in digital sales growth.
Indeed, search interest trends related to "Target" have remained healthy over the past several months. Meanwhile, Target.com web traffic is trending up relative to other shopping websites. Plus, Target is benefiting from macro boosts in consumer confidence , consumer sentiment , and retail sales , all of which support a healthy consumer spending backdrop.
Most notably, Target launched a huge Amazon Prime Day sales equivalent this year, and the results were very promising . The huge one-day sale event drove record-high traffic and sales on Target.com.
Overall, it looks like Target has been doing just fine since the company last reported earnings, implying that gains in TGT stock over the past three months are fully warranted.
Target Stock Is Fairly Valued at $80
Long-term, Target has healthy upside through enhanced omni-channel commerce capabilities. Meanwhile, the build-out of a private-label business gives the company a healthy moat against competition, while also assisting in margin stabilization. On the in-store front, store remodels will drive healthy traffic gains while also contributing to the company's moat against Walmart.
Put all three of those tailwinds together, and it becomes clear that this is a mild revenue growth company with an ability to stabilize margins, even in the face of increased wage pressures. Under those assumptions, I think that Target has earnings power of $6.90 per share in five years.
A market-average 16X forward multiple on $6.90 implies a four-year forward price target of $110. Discounted back by 10% per year, that equates to a year-end price target for TGT stock of roughly $83.
Bottom Line on TGT Stock
Target has healthy go-forward growth prospects, but at $80, those growth prospects are fairly priced into TGT stock. Consequently, this is no longer an undervalued stock with big upside potential. Those days are over.
Instead, at $80, TGT stock is a fairly valued stock with decent upside potential.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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