As a company, Target has had a tough year dealing with the aftermath of the largest corporate data breach in history. They suffered millions in related costs and lost sales causing the company to halt their share repurchase program, which have resulted in a year over year expected earnings decline of 26%
As a stock, Target spent months in the penalty box, trading in a range between $55 and $65, but finally broke out on better than expected results (albeit off of low expectations) and the stock has since made new all time highs (made this morning).
Here is the thing, the stock has offered shareholders no shortage of reasons to sell over the last couple of years, from very poor results in their Canadian unit, to poor execution with the data breach that continues to have aftershocks into the holiday season. However, in the last report the company showed modest improvement on most fronts.
So with the stock at all time highs, it’s trading at 20x next year’s expected earnings growth of 19%, despite only expected sales growth of 3%. But the company suspended their share repurchase earlier this year, and on their Q3 call management gave an update on a share buyback that would have likely been $2 billion:
And given current performance and our goal to maintain our single ‘A’ debt ratings, we don’t anticipate any share repurchase in the fourth quarter as well. Of course the timing and magnitude of any future share repurchase activity will depend on the pace of improved financial performance in both the US and Canada.
Analysts expect the company to start buying back boatloads of shares in 2015 causing earnings growth to rebound dramatically, but normalized growth is likely to be in the low to mid teens, not high teens. So the question you have to ask yourself at all time highs is what do you pay for this sort of growth given the recent failures in execution?
The company is not scheduled to report Q4 results until Feb 25th, so we are not likely to get too many company specific data points for a bit. But much like our Costco (COST) trade last week, I have a sense that much of the good news is IN the stock. The next data points are unlikely to show the same enthusiasm as those surrounding the current Holiday period. I suspect that the Holiday period is highlighted by sharp discounting and therefore low margins and I don’t expect lower oil to have the same impact that many pundits foresee as we head into mid 2015.
The stock is overbought and the estimates include artificial earnings growth with the normal low single digit sales growth, while implying a meaningful improvement in execution.
On a trailing basis, with a P/E of 26, the stock is nearing 10 year highs while forward is also hitting levels not seen in years:[caption id="attachment_49152" align="aligncenter" width="551"] From Bloomberg[/caption]
From a technical standpoint, the stock has made a very impressive run to new highs in the last few months, without the added jet fuel of share buybacks:[caption id="attachment_49153" align="aligncenter" width="600"] TGT 10yr chart from Bloomberg[/caption]
And options prices appear expensive, reflecting a debate amongst investors and Wall Street analysts (who remain mixed on the stock with 11 Buys, 16 Holds and 5 Sell ratings). Thirty day at the money Implied Vol remains elevated despite the recent 25% collapse in the VIX, but the stock has been moving, keeping realized vol elevated and indicating that options prices could be attractive for those looking to make directional trades:[caption id="attachment_49154" align="aligncenter" width="600"] TGT 1yr chart of 30 day at the money IV (blue) and 30 day realized (white) from Bloomberg[/caption]
With the broad market likely to re-test the prior all time highs made two weeks ago, I don’t see a massive rush to make contrarian short plays, but this one is definitely on my radar.