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TRANSCRIPT
Intrinsic Value Assessment of
TARGET CORPORATION (TGT)
AUGUST 19, 2017
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
IntroductionInthepastyear,Targethastradedashighas$78pershare.Recently,however,therehasbeenacrushingnarrativethatallretailisgoingtobedestroyedbyJeffBezos’sAmazon.Currently,thecompanyistradingfor$56,anditmightbeanopportunityifthecompanycandefenditscompetitiveadvantageandmarketshare.Here'sananalysisofthequantitativeandqualitativefactors.
TheIntrinsicValueofTargetTodeterminethevalueofTarget,let’sstartbylookingatthecompany’shistoryoffreecashflow.Thefreecashflowisimportantbecauseitrepresentsthecompany’sabilitytoretainearningandgrowthebusiness.Mostimportantly,itdemonstratesareturnontheprincipalthatmightbereinvestedintotheownershipofotherassetsandgrowthofthebusiness.BelowisachartofTarget’sfreecashflowoverthepasttenyears.
Asonecansee,theresultsinthepasthavebeensomewhatconsistentandgrowth-oriented.Todeterminetheintrinsicvalueofthebusiness,it’sveryimportanttodeterminetheprospectsofthecompany’sabilitytoearnintothefuture.Tobuildthisestimate,thereisanarrayofpotentialoutcomesforfuturecashflowslistedinthegraphbelow.
Intrinsic Value Assessment of
TARGET CORPORATION (TGT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Whenlookingatthearrayoflinesmovingintothefuture,eachrepresentsacertainamountofprobabilityforactuallyoccurring.Thereisa10%probabilityfortheuppergrowthrateof5%peryear.A50%probabilityfornogrowth,anda40%probabilityfora-10%annualgrowthrate.Assumingthesepotentialoutcomesandcorrespondingcashflowsareaccuratelyrepresented,Targetmightbepricedata9%annualreturnifthecompanycanbepurchasedattoday’spriceof$56.That’saninterestingresultconsideringtheconsolidatedestimatesforfreecashflowarecontractinginthismodel.Additionally,theoverallS&P500ispricedatabouta3%return.Now,let’sdiscusshowandwhythosefreecashflowscouldbeachieved.
TheCompetitiveAdvantageofTargetTargethassomeuniquecompetitiveadvantages.
• Averystrongbrandandloyalcustomer.Althoughmuchofretailshoppinghasmovedandwillcontinuetomoveonline,thereisstillaneedforlocalbrickandmortarbusinesses.PeoplethatshopatTargetliketheatmosphereandset-upofthestore.WhengivenachoicebetweenTargetandWal-Mart,manypeoplegenerallyagreeTargetisabetterexperience.Thisismostlyduetothecleanlinessofthestoresandoveralloperations.
• LogisticsandSupplyManagement.Targethasasuperiorsupplymanagementsystemthatrunsefficientlyandeffectively.Thecompanyseemstomanagetheirinventorylevelseffectively.The
Intrinsic Value Assessment of
TARGET CORPORATION (TGT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
inventoryturnoverratiohascontinuedtoimproveoverthepastdecadealongwiththecashconversioncycle.AlthoughAmazonperformstheseefficienciesbetterthanTarget,Amazoniscateringtotheonlinecommunity,whereasTargetwillcontinuetocompeteinthebrickandmortarindustry.
• CostAdvantage.WhenlookingatthepricesonAmazonandcomparingthemtoTarget,thereisn’tmuchofadifference.Thishasbeenthecaseforthepastfewyears,andTargetseemstoremaincompetitivewiththeirabilitytosustainrevenues.Overthepastfiveyears,Target'stoplinehascontractedby10%,butmuchofthiscanbeattributedtoAmazon’sgrowth.Themostimportantpiecetounderstandingthiscontinuedtrendishowmuchmoremarketshareonlinebusinesscancontinuetotakefromthebrickandmortarretailindustry.Ifitresultsinanother10%overthenextfiveyears,thiswilleasilybeaccountedforintheintrinsicvaluemodelalreadydiscussed.
Target’sRisksAlthoughthecompanyhasstrongassetsthatappeartohaveanenduringcompetitiveadvantage,belowaresomeoftheriskfactorsthatcouldimpairmycashflowassumptions.
• Changingcustomerdemands.Ifonlineshoppingcontinuestogrowatafasterpacethanexpected,thiscouldnegativelyimpactthecompany’sperformancefurtherthanexpected.WithcompanieslikeAmazonpushingsupplychainmanagementfurtherandclosertoeverycustomer,onlineshoppingcouldcontinueitsgrowthstreakevenfurther.Althoughthismightbetrue,themoreAmazoncontinuestoworktowardssame-daydeliveryandlogisticsexpansion,thecoststocompetewithalargebrickandmortarstorethatonlycompetesinlargelypopulatedhubsmightbedifficult.
• SecuringCustomerData.Inthepast,Targetwashacked,andcountlessamountsofcustomerdatawereexploited.Ifsimilareventshappeninthefuture,thiscoulddilutethecompany’sbrandandalsocompromisetheirbusiness.
• Failuretodifferentiate.Asmoreandmoreshoppersshifttoemotionlessshopping,Target’sbrandloyaltymightbecompromised.
OpportunityCostsWhenlookingatvariousinvestingopportunitiesonthemarkettoday,let’scomparetheexpectedreturnofTargettootherideas.First,onecouldinvestintheten-yeartreasurybond,whichisproducinga2.1%return.Consideringthebondiscompletelyimpactedbyinflation,therealreturnofthisinvestmentislikely1%orless.Currently,theS&P500ShillerP/Eratiois30.Asaresult,theU.S.Stockmarketispricedata3.3%annualreturn.IfoneweretoinvestintheS&P500,theymightpurchasealow-costETFtotakeadvantageofthisreturn.Finally,investorscouldlookforotherindividualstockstoseeiftheyarepricedforasimilarreturntothefigurespresentedhere.
MacroFactorsWhentryingtounderstandhowacompanymightperformwithinthenextfewyears,it’sveryimportanttounderstandthemacroeconomiclandscape.Today,numerousfactorsimplythattheU.S.stockmarketisinitsfinalphaseofthebusiness/creditcycle.Thereasonforthisopinionisbasedonafewkeyfactors.First,theunemploymentrateisakeyfactorforunderstandingthepositionofthecycle.Today,unemploymentnumbersareat30-yearlows.Thisimpliesachangeisafoot.Second,theShillerP/Eratiosareatthesamelevelasthe1929stockmarketcrash.Third,businesscyclesusuallylastbetweenfivetosevenyears.Today,ithasbeeneightyearssincethelastrecession.Duetothesheermechanicsofcreditcycles,thismeanstheeconomyisdueforacontraction.Finally,theU.S.FederalReserveistighteninginterestratesandlookingtostartunloadinglargeamountsofdebtofftheirbalancesheet.Altogether,thesefactorsmeaninvestorsshouldbe
Intrinsic Value Assessment of
TARGET CORPORATION (TGT)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
preparedforamarketcorrectionwithinthenextthreeyears.Thisalsomeansthatthe9%annualreturnforTargetthatweestimateforlong-termownershipmightbelowerthanexpectedwithinthenextfiveyears.
SummaryTargetisaninterestingpick.Thenarrativesurroundinganyretailbusinesstodayisnotgood.Becauseofthatgeneralization,theremightbeovercompensationinthesellingofgoodretailcompanieslikeTarget.
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