Since 2020, Target (TGT) stock has been knocking it out of the ballpark. Thanks to its omnichannel strategy, along with COVID-19 pandemic tailwinds, shares in the big box retailer have zoomed from as low as $90.52 per share after the initial onset of the virus, to around $245 per share today.
So, will investors see a repeat of this strong performance in the year ahead? Likely not. Projections of little-to-no growth point to the stock having limited room to rise in the price in the coming year.
Also, valuation may be a concern. The current stock market environment, along with its higher rate of growth as of late, have enabled Target to move to a historically high valuation. A change in this economic environment could push shares lower, or at least prevent them from hitting new price levels.
Put it all together, and I lean toward neutral on the stock. It still has a lot going for it, but given the many ways it could get knocked down again (after falling from its high of $267.06 per share), it may be best to sit it out for now. (See Target stock charts on TipRanks)
Why TGT Stock Could be Running Out of Runway
Target’s success over the past 18 months may seem largely due to factors outside its control. Still, while the unforeseen boost to its omnichannel strategy (online ordering, in-store pickup) received from COVID-19 has played a major role, you can’t discount how much of its success in recent quarters has been due to its own efforts and strategy.
Between its unique “stores as hubs” model (order online, pickup at a local store), as well as its focus on new locations in densely populated urban areas, Target has done a lot more than ride the wave of the “new normal.”
However, this does not mean the company stands to keep on delivering strong results.
As mentioned above, the sell-side believes revenue and earnings will dive in the next fiscal year (ending January 2023). Sales are expected to grow just 1.7% that fiscal year, with earnings per share slightly drifting from $12.98 per share, to $12.91 per share.
Even if it hits the top end of estimates, there may be limited room for gains. The top end of projections call for it to generate earnings of $14.16 per share. Multiply that by its current forward multiple (around 19x), and you get around $269 per share, which while above its high-water mark, is only about 10% above where it trades today.
Stretched Valuation May Signal Moderate Downside Risk
Limited growth potential going forward may limit further gains for TGT stock. Worse yet, there’s an issue that may point to it making additional moves lower.
That would be its elevated valuation. As it stands now, TGT stock trades for around 19x forward earnings. Compare that to the mid-2010s, when it typically traded at a forward P/E ratio of 10x-15x.
Two factors have played a role in this. First, Target’s higher levels of sales and earnings growth have made it help justify giving shares a higher valuation. Second, the overall multiple expansion stocks have seen, due to the U.S. Federal Reserve’s aggressive monetary policy, has played a role as well.
But both these factors could change in the coming year. This could have a big negative impact on the price of Target shares. Changes in Fed policy could cause markets to re-assess valuations, pushing shares lower. An economic slowdown may result in it falling short of revenue/earnings projections rather than beating them.
What Analysts are Saying About TGT Stock
According to TipRanks, TGT stock has a consensus rating of Strong Buy. Out of 19 analyst ratings, 15 rate it a Buy, 4 analysts rate it a Hold, and 0 analysts rate it a Sell.
As for price targets, the average Target price target is $283.22 per share, implying around 15.82% in upside from today’s prices. Average Target price targets range from a low of $248 per share, to a high of $320 per share.
Not ‘On Target’ to Hit New Highs
COVID-19’s “new normal,” coupled with the company’s smart execution of its omnichannel overhaul, have enabled shares to deliver blockbuster returns over the past year-and-a-half.
That may not be the case moving forward. Even if it hits the top end of estimates, shares may have limited room to run. Its stretched valuation is a risk as well, as a market correction/re-assessment of valuation may knock it down to substantially lower prices.
In short, staying on the fence with TGT stock may be the best move for investors right now.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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