Financial Analysis and Stock Valuation of Target Corp.
By Mingyang Li, Vaishnavi Kandhadai, Shanshan Gong, Fangxin Wang, Zhemin
Chen, Vivek Patel.
For Dr. Baek
FIN6631 Global Financial Management
Due on Nov. 17.2014
Outline
Abstract
I. Overview of Target
A. AA
B. BB
C. CC
II. Literature Review
A. AAA
B. BBB
III. Methodology
A. AAAA
B. BBBB
C. CCCC
IV. Conclusion
Abstract:
Target Corporation (TGT) is an American merchandising company,
headquartered in Minneapolis, Minnesota. The company was founded in 1902 and is
the second largest discount-retailer after Walmart. As one of the biggest retailers in
the United States of America, Target has a very illustrious yet significant history.
Although it was hailed as one of the steadiest companies in the country, the credit
card breach of 2013 put the company’s profits fell by nearly 50% in the last quarter of
2013. The paper focuses on revenue analysis, inventory analysis and property, plant
and equity analysis. Moreover, Capital Asset Pricing Model (CAPM) and Discounted
Cash Flow (DCF) method are used to calculate.
Keywords: Target Corporation, financial analysis, stock price, CAPM, DCF
Financial Analysis and Stock Valuation of Target Corp.
I. Overview of Target Corp.
Target
Corporation
(TGT)
is
an
American
merchandising
company,
headquartered in Minneapolis, Minnesota. The company was founded in 1902 and is
the second largest discount-retailer after Walmart.
As one of the biggest retailers in
the United States of America, Target has a very illustrious yet significant history.
Although it was hailed as one of the steadiest companies in the country, the credit
card breach of 2013 put the company’s profits fell by nearly 50% in the last quarter of
2013. George Draper Dayton started Good fellow Dry Goods in 1902, changing its
name to Dayton Dry Goods Company in 1903 and shortening the moniker to Dayton
Company eight years later in 1911. Fifty-one years later, in 1962, the organization
opened its first Target store, mode led as a discount version of their department stores.
In 1969, it expanded department store operations while merging with J.L. Hudson
Company, thereafter named Dayton-Hudson Corporation. Following the union, two
more retailers were purchased, Mervyn’s in 1978 as well as Marshall Field &
Company in 1990.
Halfway through the 1970s, Target became the leading producer of revenue for
the corporation, with annual sales reaching $1 billion right before the 1980s. The
beginning of the 1990s marked the first Target Great land, provided a larger range of
goods than their conventional stores. Halfway through the decade, the premier Super
Target, which included a photo studio, dining establishments, a pharmacy as well as
grocery aisles was debuted. To end the century, the company changed its name to
Target Corporation, divesting itself in 2004 of both Mervyn’s as well as Marshall
Field & Company. The company separated itself from the competition with elite
products at low prices, such as clothing lines from notable fashion designers
like Jason Wu, Zac Posen and Isaac Mizrahi. Eight years later, the corporation began
its first City Target, catering to urban clientele in stores 65% smaller than their typical
locations.
Target Plaza South, a portion of the Target Corporation headquarters complex in
downtown Minneapolis; the building originally featured the Target Light System,
created by using 3M light pipes but was replaced by more energy-efficient LEDs in
2011.
Target Corporation has its headquarters on Nicolette in Minneapolis, near the site
of the original Good fellow’s store. The complex includes Target Plaza North
and Target Plaza South. Ryan Companies developed the complex, and Ellerbe Becket
served as the architect. Target had the approximately $260-million complex
developed to provide one location of office space for 6,000 employees. The 14-story
Target Plaza North has 600,000 square feet (56,000 m2) of office and retail space,
while the 32-story Target Plaza South has 1,250,000 square feet (116,000 m2) of
space.
Mission Statement
Our mission is to make Target your preferred shopping destination in all channels
by delivering outstanding value, continuous innovation and exceptional guest
experiences by consistently fulfilling our Expect More.
This research paper will also focus on inventory turnovers, receivables turnovers,
payables turnovers and working capital turnovers. A deeper analysis would also be
made of other components of Operation Activities Ratios, Investment Activities
Ratios, Liquidity Ratios, Debt and Solvency Ratios, and Profitability Ratios
II. Literature Review
A turnover ratio calculates the number of times a company’s inventory is
replaced during a certain number of financial years or time period. An analysis of a
company’s turnover ratio is important to understand the financial progress of a
company. A high turnover ratio is a sign that the company is making steady sales, as
in, it is producing and selling its goods at a steady pace. Most commonly, researchers
use ratios as predictor variables in models that forecast business distress and failure
(Altman 1968; Altman, Haldeman, and Narayanan 1977; Altman 1984)
Turnover ratio is calculated as CGS (cost of goods sold) divided by average
of inventory during a certain period of time. To measure stock market development,
we use the Turnover Ratio measure of market liquidity, which equals the value of the
trades of shares on domestic exchanges divided by total value of listed shares.
It
indicates the trading volume of the stock market relative to its size. (Beck and Levine,
2002)
While several literatures talk about Turnover Ratios in general or about Inventory
Turnover Ratios, there is not much literature written about the analysis of other
turnover ratios like Receivables Turnover Ratios, Payables Turnover Ratios, Working
Capital Turnover Ratios, Average Inventory Processing Period Ratios, Average
Receivable Collection Period Ratios, Operating Cycle, Average Payables Payment
Period, Cash Conversion Cycle, ROA and ROE, to name a few- especially in larger
firm sizes like Target Corporation.
For example, Gombola and Ketze (1983) examined 58 different ratios widely
used by practitioners and researchers and find evidence that different sets of ratios are
more appropriate depending on industry classification of the firm being examined.
They also find that the relevance of certain ratios remains stable over time within a
particular industry grouping. (Osteryoung, Constand, Nast, 1992) This provides
evidence for differences in ratios across industries, however, it fails to concentrate on
a specific firm.
Hence, the necessity arises to concentrate on a specific firm and analyze its
financial standing across multiple ratios for a thorough analysis of the company’s
standing. Target stocks inexpensive designer products to attract relatively affluent
customers. That strategy has contributed to a 16.5-percent annual rate of growth in
earnings over the past 10 years and 13.5-percent growth over the past five years,
Value Line reports. Annual sales growth was 8.5 percent for both periods. (Lamiman,
2006)
What makes Target Corporation’s financial situation more interesting is its data
breach of 2013. On Dec. 19 management announced the unauthorized access of the
credit and debit card information of up to 40 million shoppers who had visited Target
between Nov. 27 and Dec. 15. Initial reports indicated relatively few customers had
been affected by fraud problems. (Lamiman, 2014) Since the financial ratios were one
of the aspects this credit breach affected, this research paper is even more relevant to
analyze Target’s financial ratios and chart a map on how it affected the company’s
earnings and assets between 2013 and 2014.
In retrospect, the lack of concrete data and analysis of Target Corporation’s
financial situation between the years 2010 and 2014 has aided this research
extensively. Data was collected from various sources, analysis was conducted on
several previous studies made on the topic of financial ratios, financial statements and
Target Corporation to identify this specific topic of research by the team.
III. Methodology
We use three steps to calculate the stock valuation of target corp. The first steps is
to analysis the growth. The second steps is to analysis the market valuation. Finally,
we use the two analysis to calculate the stock price
Growth analysis.
1. growth rate analysis
1.1 computer the annual percentage growth
We use the average of five year rate and latest quarters to estimate the
growth rate of 2015.
Annual Growth
Estimated
Latest
2014
2013
2012
2011
2010
Rate
2015
quarter
2.17
1.69
-0.96
4.92
3.62
3.11
0.63
-7.32
-61.05
-32.08
5.61
7
21.21
15.38
0.19
0.09
0.20
0.20
0.31
0.27
0.10
Net sales %
Year to year
Earnings per
share %
Year to year
Dividends
Year to year
1.2 .computer the internal growth rate
Growth=retention rate *return on equity.
Column 1
Latest
2014
2013
2012
2011
2010
51.4
29.2
25.7
21
20
quarter
Payout Ratio
72.5
We use the payout ratio of lowest and highest to calculate the growth ratio
of 2015
Retention Rate
Return on Equity
Internal Growth Rate
0.80
2.74
2.19
0.28
2.74
0.75
Market valuation
1. Current valuation
TGT
Industry Avg. S&P 500
TG 5Y Avg.
Price/Earnings
27.7
18.9
18.6
14.9
Price/Book
2.5
3.5
2.7
2.5
Price/Sales
0.6
0.6
1.8
0.6
Price/Cash Flow
10.7
11.6
11.5
6.5
Dividend Yield % 2.8
2.0
2.1
1.9
Price/Fair Value
-
-
-
Premium
2. Forward valuation
TGT
Industry Avg.
S&P 500
Forward Price/Earnings
20.4
-
17.6
PRG Ratio
2.4
-
-
PEG Payback (Years)
11.3
-
-
3. Valuation history
Price/Earnings
TGT
23.6
21.6
19.1
14.6
10.4
16.9
15.8
11.9
13.1
16.9
27.7
S&P 500
19.0
17.3
16.8
16.5
10.9
18.6
15.5
13.7
15.0
18.6
18.6
TGT
3.8
3.6
3.3
2.6
1.9
2.4
2.9
2.3
2.4
2.5
2.5
S&P 500
3.0
2.8
2.9
2.7
1.7
2.2
2.2
2.0
2.1
2.6
2.7
TGT
0.9
1.0
0.9
0.7
0.4
0.6
0.7
0.5
0.6
0.6
0.6
S&P 500
1.6
1.5
1.6
1.5
0.9
1.2
1.3
1.2
1.3
1.7
1.8
Price/Book
Price/Sales
Price/Cash Flow
TGT
15.6
12.2
11.5
9.1
6.3
6.4
7.8
6.6
6.8
6.1
10.7
S&P 500
11.4
10.7
11.1
11.6
6.8
9.1
9.3
8.5
9.2
11.2
11.5
Stock price analysis
1. Computer the required rate of return
1.1 CAPM estimate
We use 10 year the Treasury bond of 4 years to calculate the risk free rate, and
also use the S&P 500 of 4 years to calculate the market premium rate. The
formula of required return is
Required return =risk free rate +beta*(market premium rate)
Column 1
S&P 500
TGT
Average of 5 years bond
Monthly average
0.0106007
0.00724347
0.02336383
Annual average
0.127209
0.08692163
Beta
0.068815647
Required return
0.094825556
1.2 DCF estimates
The formula is as following.
rs =D1/Po +g
Growth Rate
Dividend of next
Current Price
Required Return
year
0.007535
2.054777467
$65.72
3.88%
0.02192
2.054777467
$65.72
5.32%
1.3 bond’s yield plus judgment risk premium
Bond`s Yield
Judgement Risk Premium
Reruired Return
2.34%
4%
6.34%
2. Computer the estimated stock price
2.1 dividend discount model
I assume it will be the constant growth model, and I use the range of required
rate and growth rate. I average the estimated stock price, so the estimated
stock price of 2015 will be $54.5354083.
Po=D1/ (rs-g)
Estimated Stock Price
Growth Rate
Required Return
0.007535
0.02192
0.09
23.53951644
28.18409999
0.06
36.80495319
49.57981629
0.05
45.01092946
65.72
0.04
65.72
121.723951
2.2 P/E ratio approach
Forward P/E is 20.4, and estimated EPS is $2.1964765.so the estimated price
will
$44.8081206
Current EPS
Estimated Growth Rate
Estimated EPS
2.37
-0.07
2.1964765
I average the estimated price.so the estimated price of 2015 will be
$49.67176445. the price is $66.72 right now , so it is overvalue.
Financial Analysis Based on Financial Statements
With 1,793 stores throughout 49 states and 37 distribution centers in the United
States, Target is taking the place or your local corner store (Target, 2014).
According to Target's financial statements, sales, profitability, and gross margins may
be affected by the current trends, which alter consumer preferences. This situation
will occur when Target doesn't comply with these changes it could negatively impact
operating profit and cause Target to lose money on inventory items with spoilage and
markdowns (Target, 2014). Due to the company’s dependency on macroeconomic
conditions and significant sales in California, Texas, Florida, Minnesota and Illinois it
is important to maintain consumer loyalty in these areas (Target, 2014). Target
remains successful by upholding four core principles: guests, team members,
community and shareholders (Target, 2014). Competition in the retail industry is
highly competitive. They plan to make themselves apart from the rest by focusing
on the customer’s shopping experience. All year long they offer the right price,
convenience, variety, price matching, programs offering incentives (Cartwheel and
RedCard to receive percentages off items) and great marketing strategies.
The
ultimate payoff for their focus can be seen during the fourth quarter and what we
know as the holiday season.
During the holiday season of 2013, Target was victim to a system breach.
The
system breach affected over $40 million debit and credit card accounts involving 70
million people (Target, 2014).
This security invasion affected lots of Target’s sales.
The year ended with $72.6 million of dollars in revenue with a decrease of $705,000
from last year’s sales (Target, 2014). Their numbers in 2013 did not waiver too much,
because Target included revenues from their Canadian stores which are usually not
included, but took the place of absent credit sales based on the breach. The breach
cost Target $61 million in pretax expenses and $44 million to be covered by insurance,
leaving the company with $17 million to pay out of pocket as SG&A expense (Target,
2014).
The extent of this matter has yet to be resolved as it is an ongoing
investigation, so estimates of total losses are unavailable and will be recognized upon
completion.
The data breach affected more than just the revenues in the company, the earnings
per share also took a hit, and dropped to its lowest point since 2009 (Target, 2014).
The drop from $4.52 to $3.07 is a 32.1% change and reflects sales and the hesitance
customers felt in regards to the breach (Target, 2014).
Even when faced with
adversity Target still came out of top, landing a positive net earnings of $1.9 million
(a 34.3% decrease from 2012) and $6.5 million in cash flow from operating activities
(Target, 2014). The gross profit margin and operating profit margin also suffered at
29.5 % (23.49%) and 5.8% respectively (MorningStar, 2014). Walmart’s revenues
are larger than 469 million, with a gross profit margin of 24.4% (Walmart, 2014).
The massive amount of revenues extends from Walmart’s functioning in over 27
countries, compared to Target’s operations in the United States and Canada (Walmart,
2014). Also, Walmart has an operating income of $27.8 million, representing 5.9%
of net sales is also below the industry average of 6.62% (MorningStar, 2014). Thus,
bigger numbers do not necessarily means better financial health.
Short-term Liquidity
First step in evaluating the financial health of a company is to determine its
liquidity and solvency.
Last year Target’s current ratio was 0.91 and reflected the
sudden increase in accounts payable and overall liabilities involving the data breach
during their peak season.
In the two years prior, in 2011 and 2012, the current ratios
were 1.71 and 1.17, respectively. In both years, their current ratio was above the
industry average of 1.15 however these fluctuating numbers indicate there was a fault
in managing their short-term liquidities (MorningStar, 2014). When compared to
Wal-Mart’s current ratio of 0.88 and previous trends of a below one average, Target’s
ability to pay short-term debts could be placed on a pedestal (MorningStar, 2014).
Operating Efficiency
Turnover ratios are essential in measuring the operating efficiency of the firm.
Although the company has reached an all-time high within the last five years for total
asset turnover (1.57) this number is still below the industry average of 2.06 (Reuters,
2014).
This increase shows that management has improved receivables and
inventory.
However, Walmart’s figures exceed an industry average at 2.34 and
implies that they have utilized their assets better in order to increase sales. This can
also be seen with their ROA percent at 7.82 (Walmart, 2014). Although Target lacks
in this area, I assume that it involves the loss of sales during their peak season that
negatively impacted their number (4.42%) (Target, 2014). Capital Structure and
Long-term Solvency
It is vital to include the amount of total debt in respects to total assets to advise
possible risks. Target’s debt ratio was 63.56% a slight decrease from 2012’s 65.62%
signifying the company is well leveraged (MorningStar, 2014).
Compared to Walmart, Target does not outperform this competitor. Given the
information obtained by using the Du Pont System, I concluded that Target having an
ROE of 11.70 and Walmart, 21.14 that Walmart is outnumbering them through net
profit margin, total asset and return on investment (MorningStar, 2014).
In order for
Target to reach these heights, management should focus on increasing sales, and
doing so without overcompensating with assets. Target is on its way to new heights
and is doing it with applications from your phone. It is important for them to take
heed to industry comparisons and note trend analysis, because of the evolving market.
Industry analysis provides what a typical financial analysis wouldn’t, and that’s
performance, future insight, and the performance of the company based its
performance in the industry.
IV. Conclusion
Overall, Target Corporation has a solid history of steady growth. In recent years,
its stock has performed well. With a few suggestions, Target can become an even
more relevant brand, dynamic retailer and can become a player in global retail
markets. Opportunities exist in:
Strengthen data security or success to detect and appropriately respond to
significant data security breaches.
Continued to innovate and minimize costs in order to price competitively with
Wal-Mart.
Target must strike a balance between offering new exclusive products to keep the
customer interested and maintaining a good selection of basic items at low prices.
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MorningStar.
"Wal-Mart
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WMT."
2014.
MorningStar.
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Reuters.
"Financials:
Target."
2014.
Reuters.
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Target.
"FORM
10-K."
2014.
Target.
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Walmart. "Walmart Annual Report." 2014. Walmart. .
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