The stock of Target (NYSE:TGT, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $199.65 per share and the market cap of $99.5 billion, Target stock is believed to be significantly overvalued. GF Value for Target is shown in the chart below.
Because Target is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 11.9% over the past three years and is estimated to grow 0.87% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Target has a cash-to-debt ratio of 0.56, which ranks in the middle range of the companies in the industry of Retail - Defensive. Based on this, GuruFocus ranks Target's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Target over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Target has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $93.6 billion and earnings of $8.65 a share. Its operating margin is 6.99%, which ranks better than 84% of the companies in the industry of Retail - Defensive. Overall, the profitability of Target is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Target over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Target's 3-year average revenue growth rate is better than 82% of the companies in the industry of Retail - Defensive. Target's 3-year average EBITDA growth rate is 13.2%, which ranks in the middle range of the companies in the industry of Retail - Defensive.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Target's ROIC is 16.25 while its WACC came in at 7.31. The historical ROIC vs WACC comparison of Target is shown below:
In summary, Target (NYSE:TGT, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Retail - Defensive. To learn more about Target stock, you can check out its 30-year Financials here.
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