Target (TGT): 2019 Top Picks' Mid-Year Update

07/23/2019 5:00 am EST

Focus: CONSUMER

Chris Quigley

Contributing Editor, The Prudent Speculator

Chris Quigley, contributing editor to The Prudent Speculator, chose Target (TGT) as his favorite investment idea for 2019. The retailer rose 33% in the first half of the year. Here's the latest update from the value investing specialist.

Shares of merchandise retailer Target have risen by more than 30% this year, buoyed by strong same store sales comps, growing digital sales and cost controls. TGT’s rise was accelerated by beating EPS expectations in fiscal Q4 2019 (reported in March) and Q1 2020 (reported in May).

As a result, both management and analysts hiked EPS guidance for the full year. In fiscal 2020, TGT expects EPS between $5.75 and $6.05 per share (compared with $5.39 in 2019).

We think that Target’s evolution has been rewarding both for customers and shareholders and believe the company’s in-store experience rivals (or exceeds) that of the competition.

The company does a substantial online fulfillment operation out of its retail stores, which we believe is highly efficient and cuts down on long-distance shipping charges. Customers also have wide range of choices when it comes to delivery options, from free to relatively inexpensive same-day options.

The share price increase has done little to change our long-term outlook for the retailer, particularly as the forward P/E ratio has expanded only modestly since December. In our broadly diversified portfolios, every stock is fighting for its position and we think TGT more than earns its spot as a best-of-breed retailer.

The multi-year overhaul at Target did not come easy; it was costly to close the Canadian operation, a big commitment to open small-format stores (which are fortunately quite popular with customers) and expensive to remodel existing large-format stores.

However, the investments have paid off with customers, who have voted favorably with their wallets. In our view, the death of brick-and-mortar retail was greatly exaggerated. Target also scores highly in our proprietary scoring system. TGT trades for less than 15 times next 12-months' earnings and the just-hiked quarterly dividend translates to a yield of more than 3%.

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