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Target Should Catch Bulls' Eye

The retailer continues to prove itself as best of breed, and the stock could reach $80.

Target (TGT) - Get Target Corporation Report reported a solid fourth quarter Tuesday, continuing to prove it is one of the best discount retailers in the business.

For the fourth quarter ended Feb. 3, the retailer earned $1.29 a share on revenue of $19.71 billion, slightly ahead of Wall Street estimates on both counts. The company also said analysts' fiscal 2007 estimate for earnings of $3.60 a share is "within range of the likely outcome."

Target has gotten so large that the days of blowout upside surprises are probably a thing of the past. Nevertheless, quarter in and quarter out, the company shows itself to be a retail powerhouse.

You may not be likely to double your money in a few years by investing in Target, but I suspect a 15% annual return over the next two years, not including the company's nominal dividend, is very doable. Here's why.

Target continues to find ways to ramp sales. Whether it's bringing in lifestyle brands such as GO International or expanding its grocery offerings, customers have new reasons to spend at Target.

Not only are shoppers buying, they are increasingly charging the merchandise to the Target credit card. Credit revenue grew nearly 19.5% in fiscal 2007, while merchandise sales climbed 12.9%.

Management said it will increase its food offerings during the year. While that may put a crimp in margins (groceries are notoriously low-margin), it should drive sales. It's not difficult to imagine the Target customer who comes in to pick up a pair of jeans and a top, leaving with milk, eggs and ingredients for tonight's dinner -- and vice versa.

Target, while competing on price with rival

Wal-Mart

(WMT) - Get Walmart Inc. Report

, continues to differentiate itself from the retail giant. The company plans to introduce merchandise this year that cater to a more upscale clientele, with offerings such as yoga and dance wear and Burt's Bees health and beauty products.

The Numbers

Target squeezed out a 19-basis-point improvement in gross margin in the fourth quarter. On the call, the company's management said not to expect much margin improvement in the coming year because of the impact of food sales. Management may, however, be conservative and able to eke out a few points of improvement.

Credit revenue growth is expected to exhibit continued strength, though it may be difficult to match last year's blistering growth rate. This is a high-margin source of revenue, so a bull would like to see the company continue to post significant gains in this category.

TheStreet Recommends

Target also has $1.5 billion left of a $5 billion stock repurchase program. The company aims to complete its buybacks by the end of 2008. Assuming management does repurchase shares in 2007, that should boost earnings per share as well.

Target has a track record of under-promising and over-delivering. The company has beaten Wall Street's target in seven of the past eight quarters (and matched the forecast in the eighth). On Tuesday, management endorsed Wall Street's prediction for EPS of $3.60 in 2007. Analysts are calling for earnings per share of $4.11 in 2008 (prior to any adjustments after the earnings call).

At Tuesday's closing price of $59.40, Target is trading at 18.9 times trailing 12 month's earnings of $3.21 per share. Should the company hit the $4.11 estimate that Wall Street is calling for in 2008 and keeps its current multiple, the stock would trade at $78.

While it's difficult to make an apples-to-apples comparison between Target and its competitors, Wal-Mart and

Costco

(COST) - Get Costco Wholesale Corporation Report

are probably the best choices to compare valuations.

On metrics such as price-to-earnings ratio, Target is more expensive than Wal-Mart but cheaper than Costco. When you look at price-to-sales and price-to-book, Target is the most expensive of the three. However, it has the strongest growth rate, and on price-earnings-to-growth it is the biggest bargain of the three at 1.25 times its 15% growth rate.

The technicals look positive as well. After more than doubling between March 2003 and July 2005, the stock carved out a base until it broke out of that range in January of this year. With Target trading near support at $60, this appears to be a low-risk entry point. A meaningful break of support at 60 could indicate a significant correction.

New investors may want to consider scaling in with a small investment now and wait to see how the stock handles the selloff. That way, if Tuesday's action was an anomaly and the bull ride continues, investors will have some exposure. On the other hand, if Tuesday truly was the beginning of the end of the bull, investors will have some bullets in the chamber to pick up shares of a best-of-breed discount retailer at lower prices.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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