Target Has Strong Upside Potential; Likely to Log Over 50% Jump in Q4 Profit

Target, one of the largest North American retailers offering customers both everyday essentials and fashionables, is expected to report a profit of $2.55 per share in the fourth quarter, which represents year-over-year growth of over 50% from $1.69 per share seen in the same quarter a year ago.

“We maintain our 4Q20 EPS estimate of $2.55 on comps +17.2%, in line with holiday sales, but could see upside on stimulus benefit in Jan. We model FY21 EPS of $8.96, +2% above Street. Target’s (TGT) ability to comp the comp will be the headline topic at its Investor Day, and management could conservatively guide FY21 comps and EPS to -LSD to -MSD,” said Oliver Chen, equity analyst at Cowen and Company.

“Fundamentally, we do believe TGT’s momentum is well-positioned to continue as consumers invest in home, appreciate TGT’s private brands, and take advantage of a myriad of convenient and innovative shopping modalities including Drive-Up; furthermore, the backdrop of stimulus payments and a high savings rate are strong positives.”

In the last four consecutive quarters, on average, the company has delivered an earnings surprise of 60%. The Minneapolis, Minnesota-based company would post year-over-year revenue growth of over 17% to $27.419 billion.

Target shares, which surged over 37% in 2020 and added another 6% so far this year, traded about 2% higher at $186.51 on Monday.

Target Stock Price Forecast

Twelve analysts who offered stock ratings for Target in the last three months forecast the average price in 12 months of $216.33 with a high forecast of $235.00 and a low forecast of $195.00.

The average price target represents a 16.35% increase from the last price of $185.93. From those 12 analysts, 10 rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $195 with a high of $250 under a bull scenario and $135 under the worst-case scenario. The firm gave an “Equal-weight” rating on the mass-market retail company’s stock.

“We like Target (TGT) and believe its positioning post-COVID-19 is among the best across Retail. We are equal weight rated as valuation seems fair against Street estimates that also seem reasonable. As highlighted in our 2021 Outlook, we could be more constructive on TGT if we could more comfortably get to an $11 2022 EPS scenario. We think bullish ’21 EPS estimates are in the $10-$10.50 range followed by something similar and/or modest growth in ’22. Getting to $11 by ’22 is not unrealistic as it would take 3%-4% comps in each of the next two years,” said Simeon Gutman, equity analyst at Morgan Stanley.

“This top-line growth seems a bit optimistic though and assumes TGT retains nearly 100% of its 2020 market share gains. As we look for ways to get more constructive, we thought valuing Shipt offers an interesting angle with “hidden” asset value. As discussed below, we think Shipt could be worth ~$7b and have reflected this in our updated bull case. Our TGT bull/bear case spread now tilts positively and as we learn more about this asset, we will consider incorporating it into our base case.”

Several other analysts have also updated their stock outlook. BofA Global Research raised the price objective to $260 from $225. Stifel upgraded to buy from hold and upped the target price to $225 from $200. Target had its price objective boosted by Telsey Advisory Group to $225 from $190. The brokerage currently has an outperform rating on the retailer’s stock.

Moreover, Raymond James upped their price objective to $200 from $180 and gave the stock a strong-buy rating. Argus upgraded Target from a hold rating to a buy rating and set a $205 price target on the stock.

Analyst Comments

“TGT comped +17.2% in November and December and we believe trends accelerated in January driven by the stimulus. Hence, we expect TGT to print a high teens comp in Q4 with EPS in the $2.50-$3 range, vs consensus at +16% comps and $2.54 in EPS. Similar to other COVID environment beneficiaries, a Q4 beat is unlikely to change the debate as investors are focused on ’21 guidance,” Morgan Stanley’s Gutman added.

“We expect TGT to guide to slightly negative to flat comps for ’21 and EPS between $9 and $10 (vs. the Street at -3.5% comps and EPS of $8.78), including gross margin expansion as mix normalizes and modest SG&A deleverage on lower sales growth. Bulls are likely looking for a flat to LSD comp guide and ’21 EPS in the $10 – $10.50 range, which would require SG&A leverage in addition to gross margin expansion.”

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