I believe that Target Corp (TGT, Financial) is an interesting investment option to consider for the next few months. This article discusses the reasons to be bullish on the company with a 2-3 month investment horizon.
As an overview, Target operates general merchandise stores in the United States and Canada. As of September 15, 2014, the company operated 1,925 stores, including 1,795 stores in the United States and 130 stores in Canada.
From a stock price perspective, Target has moved from $61.12 on November 5, 2014 to current levels of $75.06. I believe that the current rally will sustain for reasons to be discussed in the article. I must also mention here that Target has a dividend payout of $2.08 per share, which is sustainable and the company also has a low beta of 0.9.
It is important for investors to hold some low beta stock as US markets trend to record highs. While I am not suggesting that markets will crash or correct significantly, portfolio diversification towards low beta stocks is important. From that perspective, even Wal-Mart (WMT, Financial) is interesting and I am bullish on Wal-Mart as well for the next 2-3 months.
Coming to the first reason to be bullish on Target, the US third quarter GDP growth surged to 5% and consumption was one of the biggest factors for strong GDP growth. I believe that consumption spending will remain strong in December and in January with US consumer confidence at its highest levels since the financial crisis.
Further, with an improved jobs market and lower gasoline prices, consumers have more flexibility in terms of spending during the festive season. For this reason, I believe that the company’s December 2014 and January 2015 sales will be robust.
The stock is already discounting the positive factors as it trends higher. However, I believe that there will be more upside when the company reports fourth quarter earnings. For the third quarter of 2014, the company’s adjusted EPS was $0.54, which was above the expected range of $0.4 to $0.5. In the coming quarter, the EPS is again likely to beat estimates going by the factor of strong consumer confidence and lower energy prices.
In fourth quarter of 2014, the company expects adjusted EPS of $1.13 to $1.23. An EPS above $1.23 per share will send the stock higher and I believe that strong EPS growth is very likely.
I must also mention here that Target can be a good investment even from a long-term perspective (as long as consumer spending remains robust in US). I consider the stock as a good investment for the value creation coming through higher dividends. For 3Q14, Target paid dividends of $330 million, an increase of 21.4% from $271 million last year.
Strong dividends growth is likely to continue in current market conditions and the stock can be an attractive dividend stock for the portfolio. The current dividend yield of 2.9% is healthy and very sustainable.
From a risk perspective, I have to mention that the company’s operations are concentrated in US and Canada. While robust GDP growth is resulting in strong growth for the company, a decline in GDP growth can trigger a stock slide. However, I expect US GDP growth to remain robust through 2015 and therefore I don’t expect the stock to slide from current levels.
In conclusion, the festive season, lower gasoline prices, improved job market and a high consumer confidence will take Target higher from current levels over the next 2-3 months. The company’s 4Q14 results can be the next big stock upside trigger. My recommendation is to remain invested in the stock as it is likely to outperform the S&P 500 index in the coming months.
