Target

At $160 I am not sure Target is even a good deal. It would seem margins are likely to revert back to the 4.5% level. If you extrapolate out 5 years with 5% revenue growth and account for margins returning to historical levels you get net income in the $6B - $7B range - about where it is now. If it trades back at a 20x it would still only get you a $250 price target - 5 years from now or a CAGR of around 10% - add in 2% for dividends and you are at 12%. Nice but not great IMO.

Here is some data


Year	Revenue	Income	Margin
2018	72	2.91	4.04%
2019	75	2.94	3.92%
2020	78	3.28	4.21%
2021	93	4.37	4.70%
2022	106	6.95	6.56%
---
2023	111		
2024	117		
2025	123		
2026	129		
2027	135	6.09	4.50%

Rounding up Income to current levels and share count staying flat gets you $14 in EPS x 18 = $250.00 target (pun intended).

tecmo

3 Likes

I just closed my Target position today. It freaking hurts. AMZN, TGT, PYPL, CRWD, all big drop, round trips…

I bought a little CRWD today, also SNOW. Looking at PYPL. May buy more MSFT, ADBE. Got a lot of GOOG but could buy even more. Great names at very good prices.

No retail companies. Sell electrons instead. Better yet, license their use.

2 Likes

Got a lot of GOOG but could buy even more.

Likewise.
Though earnings were perhaps a bit cyclically elevated lately, I don’t think they’ve traded at under 20 times trailing earnings like this since isolated stretches in 2011-2012.

This sort of valuation level, on sundry metrics, usually leads to a pleasant short-to-medium term outcome.

Jim

3 Likes

Though earnings were perhaps a bit cyclically elevated lately,

This is a big risk - are margins going to return to the low 20s or has there been a systematic uplift in their business model? I tend to split the difference - probably not sustainable at current levels but an improvement over previous years. My guess is that they can control this dial almost at will without much impact on the short term business. We have probably seen the high point on the dial however; so future upside from here is probably limited (margin upside).

tecmo

1 Like

Though earnings were perhaps a bit cyclically elevated lately,

This is a big risk - are margins going to return to the low 20s or has there been a systematic uplift in their business model?

A simple shortcut to avoid the issue of varying net margins is to look at price-to-sales ratios.
Purchases at these levels–around 5.5 times sales–have historically worked out very nicely indeed, pretty promptly.

The future will be different, for sure. We’re not sure in what ways.
But I think they will be making good money, not less than this in real terms per share, long after I’m gone.

It’s a primitive view, but a P/E of 20 is probably not so bad.
Earnings are probably inflation protected as with most equities, so even with zero real growth it’s inflation + 5%/year earnings yield indefinitely.
Not worst case, but not bad for the likely downside.

Jim

5 Likes

Getting a little bit back on top - Target. One thing they highlighted in the call was that traffic was stable, but purchasing patterns switched from high value home items to low value consumables (such as sunscreen).

I think this bodes well for DG & DLTR for those interested in a little speculation/gambling ahead of the earnings next week.

tecmo

Re: GOOG Margins - when I say “big risk” - I should have been more specific. Their margins range from terrific to incredible. So really there isn’t much risk in buying at current levels (IMO).

tecmo

Re: GOOG Margins - when I say “big risk” - I should have been more specific. Their margins range from terrific to incredible. So really there isn’t much risk in buying at current levels (IMO).

Understood.

I took you to mean “big risk” in the sense of earnings being potentially a bit misleading about the exact current spot on their growth trajectory.
There are some big moving parts that can cause squiggles in the net margins and current profit figures.
But as you say, they’re always good, it’s just a matter of how good.

Imagine somebody gave you a cheque for $50bn to spend to set up in competition with them, undercut them, with the goal of taking at least half of each of their main businesses.
Could you?
Nope.
Sounds like a pretty big barrier to entry to me. Which usually means margins that are abnormally high long into the future.

It’s hard to spot big risks.
Vigorous antitrust actions are usually good signs, oddly enough.
When you’re so profitable that the government breaks you up, shareholders still tend to do well continuing to own the pieces.
They don’t do that to companies that aren’t hugely successful and profitable : )
And they aren’t even perceived as being as hated or evil as many other big firms with preposterous profits. For now.

Jim

6 Likes

X-Post from Destiny Solutions board this morning with an archived link to the latest WSJ story about $TGT:

https://discussion.fool.com/wsj-tgt-ceo39s-latest-strategy-shift…