Target (TGT) recently reported strong results and guidance while providing encouraging commentary on its conference call. Action Alerts PLUS Portfolio Manager Jim Cramer and Director of Research Jack Mohr believe the company assuaged investor concerns around its comparable sales (comps) momentum, digital growth trajectory, inventory turnaround and ability to deliver strong performance in the face of a hyper-competitive promotional backdrop and reported weakness across the company's peer group -- which, on average, saw comps decline 2% in the fourth quarter and EPS drop 15%.
While investors may get picky around lower gross margins, they said -- after all, the company made the decision to invest in free shipping to drive e- commerce re-acceleration -- "we believe the quarter demonstrated the company's distinct value proposition and ability to outperform its peers amid an incredibly difficult competitive backdrop."
Cramer and Mohr do not believe the investment in free shipping is a bad decision, but one that reflects the hyper-competitive environment as the company battles titans including Amazon (AMZN) in e-commerce and Walmart (WMT) and Costco (COST) (another AAP holding) in bricks & mortar. They continue to recommend the shares given Target's robust free cash flow generation, improving return on invested capital and meaningful commitment to shareholder returns (boasting a 2.9% dividend yield and an aggressive buyback program, which is expected to reach $3 billion annually).
They added it can be argued the stock remains quite undervalued, trading at just over 14 times forward earnings estimates despite expectations for double-digit EPS growth this year.