Is This Company A Bulls Eye?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to pinpoint on a trailblazer in the discount retail store industry, Target (NYSE: TGT).

 

Strengths:

  • Slow & Steady Revenue Growth: In 2007, Target reported revenue of $59.5 billion; in 2012, the company announced revenue of $69.9 billion, representing year over year annual growth of 3.27%, a trend that is widely anticipated to sustain into the future, with projections placing 2017 revenue at $91.0 billion; due mostly from an increase in the number of target locations and revenue derived from each location

 

  • Dividend: Currently, Target pays out quarterly dividends of $0.36, which annualized puts the dividend as yielding 2.44%
  • Institutional Vote of Confidence: 78.34% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Discount Valuation: At the moment Target carries a price to earnings ratio of 13.11, a price to book ratio of 2.49, and a price to sales ratio of 0.55, representing a company trading with a discount valuation

 

  • Cash & Equivalents: Target currently possesses about $1.47 billion of cash and cash equivalents on their balance sheets, a major upside to the business

 

  • Brand Value & Loyalty: The Target brand was valued as the 78th most powerful brand in the world by Forbes, estimated to have a value of $4.4 billion, and this immense brand value combined with the incredible brand loyalty Target enjoys is a major strength of the business; brand loyalty has been boosted by a recent Target credit card campaign which gives customers 5% back on every purchase

Weaknesses:

  • Debt: Currently, Target possesses about $14.5 billion of debt on their balance sheets, a major downside to the business

 

  • Dependence on United States: 89.84% of Target’s overall business is concentrated in the United States, and this dependence on one country, especially the United States which is facing possible recession due to the fiscal cliff, could prove to be a severe weakness
  • Tight Margins: At the moment Target possesses a net profit margin of 4.19%, which is well below the ideal double digit range and leaves very little room for unexpected expenditures; these tight margins are due to Target's struggles to remain competitive in an extremely competitive market
  • Operating Expenses: Over the past 10 years Target’s business has expanded, and when a business grows so do the costs related to operating that business, however over the past 10 years operating expenses have outgrown revenues, an ominous sign

 

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1965, Target has consistently raised their dividend payouts, and this trend is widely anticipated to sustain into the future

 

  • Growth in Store Count: In 2007, Target possessed 1,591 stores in the United States; in 2012, the company possessed 1,763 stores, this trend of growth in store count is highly expected to continue into the future

 

  • International Expansion: Currently, only 6.46% of Target’s total business is comprised from its international segment, but the company plans to open 125 stores in Canada throughout 2013, and international expansion offers a huge opportunity that could fuel major growth

 

  • Acquisitions: For $1.8 billion, Target recently purchased leases for 220 Zeller stores, and this acquisition should put out a mat for Canadian expansion, and further acquisitions could fuel growth into the future

Threats:

  • Competition: The discount store industry is highly competitive, with several other major corporations battling with Target to offer the best product for the least amount of money, and this competition can lead to margin compression
  • Rising Input Prices: Target prides itself on its ability to offer discount products, and if input prices were to rise, Target would be faced with the difficult decision of either passing on the extra cost to the customer or swallowing the extra costs in their already tiny margins

Competition:

Major publically traded competitors of Target include Costco (NASDAQ: COST), Dollar General (NYSE: DG), Wal-Mart (NYSE: WMT), and Family Dollar (NYSE: FDO). All of these companies compete directly against Target and pride themselves on offering discount prices. Costco is valued at $42.44 billion, pays out a dividend yielding 1.13%, and carries a price to earnings ratio of 24.18. Dollar General is valued at $14.12 billion, does not pay out a dividend, and carries a price to earnings ratio of 15.68. Wal-Mart is valued at $227.68 billion, pays out a dividend yielding 2.34%, and carries a price to earnings ratio of 14.01. Finally, Family Dollar is valued at $7.27 billion, pays out a dividend yielding 1.33%, and carries a price to earnings ratio of 17.59.

The Foolish Bottom Line:

Financially, Target only possesses one flaw, its massive debt load. Other than that weakness, the company possesses solid and steady revenue growth, an expanding dividend, and a sizeable pile of cash. The company’s future is filled with opportunities that should fuel growth. All in all, Target is a tremendous investment, especially in this uncertain and volatile economic landscape.  


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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