$TGT Q3 Earnings Cheat Sheet

by Enis November 18, 2014 10:35 am • Commentary

Event:  TGT reports its fiscal Q3 earnings tomorrow morning before the open.  The options market is implying about a 3.5% one day move, which is slightly above the 4 quarter average of 3.25% and the 8 quarter average of about 3%.

Sentiment:  Wall Street analysts are not enthusiastic about TGT, with 11 buys, 17 holds, and 4 sells.  The average 12 month price target is actually around $61, 9% below the stock’s current level.  TGT is up 6% year-to-date, after rallying nearly 10% in the month of November.  Short interest is around 4.5% of the float, well below the 6.5% short interest 3 months ago.

Options Open Interest:  Total open interest is skewed towards puts by a ratio of 1.2 to 1.  However, options volumes over the past month have been heavily skewed towards calls, by a ratio of 2.6 to 1.

The bulk of the open interest is in Jan15 expiration.  The Jan15 65 and 75 calls both have over 10k of open interest, as do the Jan15 57.50, 55, and 50 puts.  The Jan16 60 calls also have over 10k of open interest.

Price Action / Technicals:  TGT made a new 52 week high last week, and has had a very strong move from the mid-October low.  The stock still remains well below its 2013 all-time high of $73.50, but the breakout above $65 last week is notable on the daily time frame:

TGT daily chart, 200 day ma in yellow, courtesy of Bloomberg
TGT daily chart, 200 day ma in yellow, courtesy of Bloomberg

That is the main support level to watch on the downside.  On the upside, $70 is a natural spot to watch, with the all-time high the more important technical resistance level.

Volatility:  Implied volatility is in the low-20’s, right around where it has been prior to  earnings over the past year:

TGT 30 day implied volatility, courtesy of Bloomberg
TGT 30 day implied volatility, courtesy of Bloomberg

The implied earnings move of 3.5% is also just about in line with the 1 year average move.  TGT 30 day implied volatility is likely to fall back into the mid-teens after the event.

Our View:  2014 has been a terrible year for Target’s business results, with sales only expected to grow 1% for the second straight year, but EPS declining by more than 25% year-over-year.  Yet, TGT shares are actually up 6% year-to-date. Investors are looking forward to greener pastures in 2015 and 2016, after the data breach issues and the weakness in the Canadian business hurt 2014 numbers.

In that context, TGT shares look like decent value here, priced at a P/E of around 20x, with expected EPS growth of around 15% over the next couple of years.  Execution is going to be key as Target has failed to meet expectations for 2 straight years, but the bar is lower given the low 2014 base.

A retest of the $65 breakout level would be the ideal entry for a longer-term long position in TGT targeting a move back to the all-time highs around $73.50 in the next 6 months.  However, we have no strong view on this quarter’s numbers, so don’t plan on a position ahead of the event.