Buy This Retailer for an Upside of 15%

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The American retailer Target (NYSE: TGT) is the second largest discount retailer in the U.S, after Wal-Mart. Though the company’s stock has done really well in the last few years, the company itself has not done justice to its growth potential. In 2012, Tarhet yielded a YTD return of almost 24% to its investors. However, during the last five years, the company has yielded an average growth of just 2.7% amid tough competitors like Wal-Mart (NYSE: WMT) and Costco (NASDAQ: COST). According to the company, it has massive plans of expanding itself globally in the next few years. Now, the big question is what is in store for Target Corporation in 2013?

Global expansion

When it comes to spending in the retail industry, American consumers haven’t shown much intent lately amid less disposable income. Therefore, retailers have been forced to operate on low profit margins. As a result, Target has announced that it would soon be going global. As part of this plan, the company would be opening 124 stores in Canada in March.

During the last few years, Target’s major competitor, Wal-mart, has consistently expanded itself in major economies. According to analysts, Target may eventually expand in Europe and emerging markets. Target Canada President Tony Fisher said “We always knew at some point that international expansion was going to be a part of our history.” Canada would give Target a fair idea about operating in a new country. As Tony Fisher mentioned “We’re going to learn how to translate our brand in a different language for the first time, learn how to build a brand new team in a brand new country.”

(Source: http://www.detroitnews.com)

New mobile service partners

Target recently announced that it has chosen Brightstar and MarketSource as its new service partners for Target Mobile. Brightstar is the world’s largest specialized wireless distributor, providing services to mobile device manufacturers, wireless operators and retailers; whereas, MarketSource is a market leader in designing innovative sales and marketing services. By April, 2013, Brightstar and MarketSource would replace Target’s current service partner, RadioShack. Brightstar would be taking care of Target’s supply chain and point-of-activation technology provider, while MarketSource would be responsible for in-store sales and services.

Currently, Target Mobile wireless shopping stations are available at 1500 stores in the U.S. where customers can buy mobile phones and contracts from their favorite service providers. Target’s Vice President for Electronics, John Butcher said “Collaborating with Brightstar and MarketSource will further enhance Target’s position in the wireless retail marketplace.”

Valuation

Target is trading at a forward P/E (1yr) of 12.7x which is the least in the industry; hence, it’s a great bargain. It’s earning a healthy 19% return for its shareholders, plus a payout of 32% shows that the company is keen on returning money back to its shareholders. A dividend yield of 2.3% is also one of the best in the industry. A PEGY of 0.99 depicts that it is undervalued to a great extent and has huge upside potential. Moreover, a mean target price of $70.06 on the sell side shows that Target is undervalued by almost 15%.

Target’s chief competitor, Wal-Mart faced some heavy criticism during 2012, as the company faced a lot of issues in Bangladesh, India and Mexico. However, it didn’t have a long term effect on the company’s stock. It’s selling at a forward P/E (1yr) of 12.89x, which still makes it one of the best buys in the retail industry. Wal-Mart’s mean target price on the sell side is $80, depicting an upside potential of 14%.

Just like Target, it’s yielding a dividend of 2.3%, making it one of the top dividend paying retailers in the industry. Moreover, as the company paid an accelerated dividend in December last year so, it won’t be paying any dividends until 1Q 2013. You can have a look at my detailed take on Wal-Mart here.

On the other hand, Costco’s forward P/E (1yr) of 20.38x shows that it’s an expensive investment at this moment. Moreover, its mean target price on the sell side is $105.05; hence, it has an upside potential of only  3%. A high PEGY of 1.22 also tells the same story. In 2012, Costco paid a dividend in excess of $8.10 per share. The company not only paid an accelerated dividend last month, but also gave a staggering $7 special dividend. Therefore, Costco’s payout ratio and yield don’t tell the whole story. In real terms, Costco yielded a dividend far greater than its competitors.

Conclusion

With low employment rates, high healthcare costs and an unpredictable economy; more and more Americans are cutting on their daily expenditures, which in turn means that it won’t be easy for retailers to earn attractive margins. As a result, “going global” is the key to long term profits. Therefore, Target’s biggest catalyst in 2013 would be its business in Canada. As a result, Target’s revenues are expected to grow more than 4.5% during 2013 and 2014. Thanks to Brightstar and MarketSource, Target Mobile is all set to add incremental revenue in 2013. Having said this, Target’s low PEGY of 0.99 makes it one of the most attractive stocks in the retail industry. In short, buy Target for what could be an upside of at least 15%.

 


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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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