Why Target Looks Ready to Reward Long-Term Shareholders

NEW YORK (TheStreet) – Wall Street hates uncertainty.

Although retail giant Target (TGT) has yet to fully emerge from its data breach that impacted 70 million customers, one thing is certain, the company has seen the worst. Aside from having landed a new CEO in Brian Cornell, even more important for investors, the stock has bottomed.

Shares, at $58.55, are down 7.5% on the year to date.

Discount retailers haven't faired that much better. The entire sector has managed a decline of 1.19%, including Wal-Mart (WMT) , which has shed more than 4% in 2014. So on a relative basis, Target, which is has been a target for the bears, has done OK. The company now seems poised to get back on track.

With shares trading at a price-to-earnings ratio of 19, Target seems fairly valued. This is because when looking at Target's metrics such as revenue growth and price-to-book ratio, the company is priced in accordance with the industry average.

That said, based on 2015 estimates of $4.11 per share, Target's P/E drops to 14, or five points below the average P/E of 19. On a forward-looking basis, this is still one full point below the industry average.

In others words, Wall Street expects Target to be average (to slightly down) in the next 12 months. From my vantage point, this makes Target a great way to play both the re-acceleration of U.S. economic growth and the company's own turnaround potential. That, coupled with management's plans to fix Canadian operations can be significant earnings drivers for Target in 2015.

So at around $58 per share, which is still more than 15% below Target's 52-week high, I would be a buyer here. The stock is trading at just 0.5 times revenue. The industry average is 0.8. Unless there are more weather-related impacts to worry about, Wall Street will have no choice but to correct this mistake. This means that Target can still offer meaningful value just by meeting expectations.

To that end, if the company can surprise with an earnings beat (or two) in the next six quarters, these shares can reach $65 to $70 in the next 12 to 18 months. The company is implementing changes that should improve revenue growth and earnings in the coming years, including installing Mark Schindele to run Canadian operations.

Schindele, who served as vice president of merchandising operations, has been instrumental in developing Target's new store formats like Target Express and CityTarget. To the extent he can revitalize Canadian revenue and gross margin, Target should get back on solid ground.

Reversing the year-long trend of slumping store traffic won't be easy, however. Target needs to rediscover its niche. The days of offering products at discounted prices while appearing "upscale" are over -- this, according to Wall Street.

The good news is, incoming CEO Brian Cornell, a former PepsiCo (PEP) executive, knows a thing or two about merchandising. His main challenge is to get customers back into his stores, while coming up with a new image. Cornell's three-year experience working for rival Walmart, running the Sam's Club business, will serve as an added advantage.

While no one is expecting any quick-fix solutions, Cornell, who battled Coca-Cola (KO) , is no stranger to high levels of competition. This is why investors looking for a solid turnaround opportunity should consider Target.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates TARGET CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate TARGET CORP (TGT) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TGT's revenue growth has slightly outpaced the industry average of 5.7%. Since the same quarter one year prior, revenues slightly increased by 2.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.85, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels.
  • TARGET CORP's earnings per share declined by 14.3% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, TARGET CORP reported lower earnings of $3.07 versus $4.53 in the prior year. This year, the market expects an improvement in earnings ($3.47 versus $3.07).
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Multiline Retail industry average. The net income has decreased by 16.1% when compared to the same quarter one year ago, dropping from $498.00 million to $418.00 million.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, TGT has underperformed the S&P 500 Index, declining 16.14% from its price level of one year ago. Despite the decline in its share price over the last year, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry. We feel, however, that other strengths this company displays compensate for this.

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