Dump Target? Only If You Want To Miss Double-Digit Upside

There are overreactions in the stock market all the time, leading to mispriced securities. This happens as investors tend to overreact to news or earnings. Almost no company is immune.

​Unjustified downward pressure can even happen to companies that offer products that touch every aspect of our lives. One thing that investors should remember is that these are usually near term pressures and can make for great buying opportunities. This is especially true if there is a long-term growth story is intact.

One recent example is blue-chip retailer Target (NYSE: TGT), which said last month that it had sustained a security breach of customer account info. The news continued to get worse for the stock as Target disclosed last week that additional info -- including phone numbers and street and email addresses -- might have been compromised. As a result, the company lowered its earnings outlook for its fiscal fourth quarter due to notably lower store traffic and sales stemming from news of the data breach.

However, the recent headlines are overshadowing the long-term potential for the stock. Yes, some 40 million credit and debit card accounts were breached, but Target doesn't think PINs were compromised. Will Target lose business because of this incident? Probably, but it's a $70 billion-a-year business. It's not likely that a few boycotters will have a material impact on Target's long-term sales growth.


Because of the recent headlines, investors are missing many of the positives that Target has going for it​. ​

Going into the holiday season, Wal-Mart (NYSE: WMT) was seeing positive. And though Wal-Mart is Target's biggest competitor, Target bills itself as a more upscale retailer that offers a greater assortment of discretionary items. (After all, there's a reason suburban soccer moms call the chain "Tar-zhay.")

Because of the recent headlines, investors are missing many of the positives that Target has going for it, including its PFresh grocery program. Target is building up its Web and mobile presence to offer greater convenience. Another major growth opportunity is its rapid expansion in Canada, where the retailer opened some 120 stores during fiscal 2013.

All of these growth initiatives should help Target continue generating cash flow to return to shareholders. The retailer rewards shareholders not only through share appreciation but also with dividends and share buybacks. In its third quarter, Target spent almost $1.5 billion in buying back almost 22 million shares while paying out $750 million in dividends. During fiscal 2014, the retailer plans to buy back as much as $4 billion in shares.

Target's forward dividend yield is an impressive 2.7%. Amid all the security breach news, investors may have missed the fact that Target declared another quarterly dividend last week. Its annual dividend is up to $1.72 a share, and the company expects to boost that to $3 by 2017.

Analysts are also coming out and defending the company. Goldman Sachs raised its rating on the stock just last week to "buy." Piper Jaffray sees Target posting better-than-expected fourth-quarter sales numbers over the holidays (thanks to strong sales of electronics) and has a $73 price target on the stock.

Risks to Consider: Target is not out of the woods with its security breach. The retailer is likely to stay in the news for some time as members of Congress and several federal and state regulators are investigating the breach. Furthermore, the Alabama State Credit Union filed a class-action lawsuit against the retailer seeking compensation for losses due to fraud, and more lawsuits appear likely.

Action to Take -- Buy Target with upside of close to $70. Target's five-year average price-to-earnings multiple of 15 on its expected fiscal 2015 earnings of $4.59 a share suggests the stock should be trading above $70 in just over a year. With shares 15% off their 52-week highs and a strong dividend and buyback plan, Target is a solid total yield play despite the current round of bad news.

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One thought on “Dump Target? Only If You Want To Miss Double-Digit Upside

  1. There is more to owning a stock than just making money, at least in my estimation. I am not very interested in being a part owner of a company that is so careless with its customer's information. Some of the reason for that may be that part of my own business is computer security.

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