Target has been remodeling stores to introduce their PFresh model, which offers more perishables like fresh fruit, dairy and deli products. The new offerings put them in more direct competition with Wal-Mart (WMT) and grocery stores. Target converted 341 stores in 2010 and 380 more will be converted in 2011. Target has also concentrated more on expanding into Canada as its growth prospects in the U.S. have waned.
Target had a volatile holiday season, which was reflected in the swings of the stock price and helped lead to the drop in early January. On the positive side, credit card quality has improved significantly and contributed to earnings gains. Net write-offs continue to be above normal levels, but Target is certainly not alone with that problem. Target is actively shopping the business.
Bill Ackman unsuccessfully tried to gain a seat on Target’s board, but still retains a position making up about 7.5% of Pershing Square’s portfolio. He’s been a seller for the past five quarters and unloaded another 6.75 million shares in the fourth quarter. He continues to own just over 1% of the outstanding shares but is clearly in the selling mode.
In the fourth quarter, eight gurus either added to their Target positions or opened up new positions. Most of these transactions were small. At the same time, two gurus sold out of their positions completely, and three reduced their positions, including Ackman. For Bill Frels, the stock makes up just more than 4% of his portfolio. Other large holders are Larry Robbins, with 3% of his portfolio in Target, and Ruane Cunniff, where Target makes up more than 2.6%. Kenneth Fisher is also a major holder. Target makes up 1% of his portfolio.
Target’s management has some rosy projections for the near and long term. I’m a bit skeptical of their growth projections, but even taking into account the past few years, the stock looks on the undervalued side. Earnings have consistently grown at a 10% to 15% clip over the last decade, and revenue has grown at about 10%. This will be difficult to sustain without a successful entrance into foreign markets, for no other reason than that the U.S. market is nearly saturated. That historical growth led to P/Es consistently above 20. Absent evidence to the contrary, growth will be slower, so Target no longer deserves that multiple. However, Target is currently trading below a 13 multiple, despite continuing to grow revenue and earnings. Target at least deserves a market multiple. While this doesn’t make the stock significantly undervalued, it’s undervalued nonetheless.
The Purchase Price
Disclosure: No positions