Goldman Sachs' Conviction List
Goldman Sachs analyst Kate McShane has included Target on the firm's Conviction List, granting it a Buy rating and setting a target share price of $176. Despite the stock's rise to $141 in the morning, significantly surpassing the average analyst price target of $153, this projection implies that Target has the potential to increase its value by approximately 25% over the next 12 months.
While Target was previously considered a pandemic darling, the company has faced numerous obstacles that have negatively impacted its shares. Inflation has limited consumers' spending on discretionary items, which form a significant portion of Target's business. Additionally, Target has been embroiled in cultural controversies and has become a symbol for retailers combatting increased incidents of shoplifting. These challenges have led to shrinking margins and decreased foot traffic, causing concern among investors.
A Silver Lining
Despite Monday marking Target's most significant percentage decrease since September, McShane believes that the worst is behind the company. Instead, she sees this decline as an opportune moment to buy Target stocks. FactSet data reveals that the shares are currently trading at slightly more than 15 times forward earnings, well below their five-year average of 17.1 times.
McShane anticipates that Target will encounter favorable comparisons in the upcoming year. The return to discretionary spending by an optimistic U.S. consumer amidst a soft economic landing is expected to provide a boost. Moreover, she predicts that margins will eventually recover to 6% or higher, allowing the stock to experience growth at an appealing valuation.
In conclusion, Target's stock has received a vote of confidence from Goldman Sachs, augmenting optimism regarding its future prospects. While the company has faced challenges in recent times, McShane believes that the worst is over and that Target is well-positioned for growth and recovery. Investors will be closely watching as Target continues its journey towards increasing its value by approximately 25% in the months ahead.
Target's Margins and Market Position
There has been longstanding concern among investors regarding margins, but it seems that Target is making efforts to control expenses. Furthermore, there is cause for optimism as shoppers are shifting their preferences towards higher-margin items and inventories are showing signs of improvement.
Goldman Sachs' consumer research team has observed that Americans are buying more, partially due to the consistent strength of the labor market.
Contrary to the worries of some investors about losing market share to Walmart, Target's competitive landscape appears different in the eyes of McShane. She believes that Target will continue to gain market share from traditional department stores and mall retailers. Target's success can be attributed to factors such as the introduction of new products this year, the convenience of being a one-stop shop, and the fulfillment options it offers.
While just over half of the analysts tracked by FactSet rate the stock at Neutral or its equivalent, this prediction has proven to be accurate as Target's stock has dropped by almost half from its 2021 highs above $260. The challenges faced by the retailer have been more persistent than anticipated.
Despite Wall Street's lack of optimism towards the shares, the consensus forecast for earnings per share for the full fiscal year predicts a growth of about 39% year over year, despite no increase in revenue.
While Target is still regaining its dominance from the pandemic era, the current stock price seems to be undervalued considering consumers' impressive resilience and a promising outlook for 2024. It is difficult to imagine how Target's situation could worsen.
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