The stock market has been on a bull run for close to a year and a half right now, and whether or not it will continue is open to debate. However, what is pretty clear right now is that the markets are a bit overvalued, so investors need to be mindful of stocks with unusually high valuations and the various metrics that gauge them, like price-to-earnings (P/E) ratios.
The Shiller P/E ratio, also known as the cyclically adjusted P/E (CAPE) ratio, is well above average right now at 34, up from 28 a year ago in April. It is not quite as high as it was in October 2021, when it hit 38, and the market crashed soon thereafter. However, it has been moving higher.
Thus, it may be a particularly good time to seek out undervalued stocks with robust growth potential, and one great option to keep an eye on is Target (NYSE:TGT). Here’s why.
Earnings surge on expense reductions
Target stock is up 12% year to date, and it still has more room to run given its low valuation and solid earnings potential.
The stock is trading at just 17 times earnings at present, down from about 26 in April 2023. It also has a forward P/E of 17, so it is anticipated to be a good value relative to its future expected earnings.
Target finished the last fiscal year strong, as its earnings increased 57% year over year to $2.76 per share in the quarter that ended Feb. 3. For the full fiscal year that ended Feb. 3, Target posted earnings per share of $8.90 — 50% higher than 2022 — buoyed by an efficiency initiative that resulted in $500 million in savings for the year. Part of that plan included reducing its inventory levels by 12%, which helped reduce freight, supply chain and operations costs.
Target is not due to report its first-quarter earnings until May 22, but the retailer expects it to be the worst quarter of the year, with comparable-store sales anticipated to be down 3% to 5% and earnings per share (EPS) between $1.70 and $2.10. That would be down by 10% to 20% from the previous quarter.
Target is still feeling the effects of inflation, but for the remaining three quarters of the year, it anticipates year-over-year revenue growth as inflation is expected to decline while interest rates drop. For the full year, the company is anticipating revenue growth of 0% to 2% and EPS in the range of $8.60 to $9.60, which at the midpoint would be about a 2% year-over-year increase.
Well-positioned for the long term
Target has had a couple of difficult years by its standards, with inflation taking a bite out of its sales. However, even after two of the worst years in recent history, it still has an average annualized return of about 11% per year as of May 6. Target has also been able to increase its dividend for 53 straight years, making it a Dividend King.
However, the retailer has taken advantage of this lull to position itself for long-term growth by reducing its expenses, managing its inventory, and rebuilding its cash. In fact, Target doubled its cash from operations to $8.6 billion in 2023.
This will allow the company to execute on its long-range plans over the next 10 years to remodel most of its 2,000 stores with the goal of increasing comparable-store sales in the low-to-mid-single-digit range per year. It is also planning to build 300 new stores that are expected to generate incremental sales of approximately $15 billion annually.
Just this week, Citigroup upgraded Target to a Buy with a price target of $180 per share, which would be up another 12.5% over the current price. Citigroup analyst Paul Lejuez said Target has emerged as “one of the winners within the retail landscape” with an opportunity to improve its margins.
Overall, Target is a consensus Buy among analysts from the 36 different firms that cover it, with a median price target of $190 per share, which would be up 18% over the current $160-per-share price.
Target stock could see a dip after the May 22 earnings release given the difficulty it expects this quarter, so investors may want to keep an eye on that. However, even at this current valuation, Target looks like a good buy right now.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
