Target (NYSE:TGT) continues its move higher. Since beginning its 2019 turnaround, Target stock has shot upward by more than 33%.
It seems TGT finally has the needed catalyst to catch up to the valuations of its peers. The question now for investors is if investors can still buy at a low price?
It seems the lack of respect that has plagued Target stock has begun to go away. TGT remained a bargain long after traders and consumers figured out that Amazon (NASDAQ:AMZN) would not force all other retailers out of business.
Finally, investors began to buy after the company beat earnings expectations in late May. This steady buying paused after IT-related issued emerged, but TGT stock recovered quickly and since has added another 23%.
Target Capitalizes on Opportunities
This stands in stark contrast to the 2014 data breach which took down the CEO and made Target stock dead money for most of that year.
The new-found respect for TGT brings with it a somewhat higher stock price. The forward price-to-earnings (PE) ratio that was 11.7 in January has risen to 13.9.
Likewise, the dividend produced a yield of 3.9%dividend produced a yield of 3.9% at the beginning of this year. The rising Target stock price has taken that yield to 3.1%, and that factors in the recent two-cent per share payout hike.
The good news is that Target stock still compares well to Walmart (NYSE:WMT) which trades at a 22 forward PE. It fares even better to Costco (NASDAQ:COST), which trades at about 31 times forward earnings.
Target also comes in well ahead of its two principal peers on profit margins and dividend yield. The 48 years of annual dividend increases appear set to continue.
Will Growth Continue to Drive Target stock?
The Minneapolis-based upscale discounter also beats Walmart in another area, growth. Analysts predict that profits will grow 10% this year and 6.4% the next. Walmart will not match that, and Wall Street expects it will see earnings shrink this year. Unfortunately, TGT still lags Costco in earnings growth.
Target operates more than 1,850 stores across the U.S. This naturally leads investors to wonder how much longer the company can maintain the growth rate at home.
Moreover, the bizarre and costly failure with Target Canada exacerbates that concern. After all, if it cannot succeed in a country where even Walmart has prospered, where can they expand?
Fortunately, management has answered that question (at least for now) without leaving the borders of the United States. Target has turned to small-format stores in large cities.
Historically, the company has operated 135,000 sq. ft. stores designed for suburbs. Now, the company has begun to open small-format stores. With more people living in the central city, the company has targeted this demographic with a store called CityTarget.
In other areas, they operate TargetExpress, which sells smaller items and focuses on people who use public transportation. The company will also continue to benefit from the success it has enjoyed with omnichannel retailing.
These moves helped to produce the stellar numbers from the previous quarter. Online sales grew by 42% on a year-over-year basis, while comparable store sales increased by 4.8% over the same period.
Should Investors Buy Target stock?
Given the performance of omnichannel and the new store formats, the short answer is that yes, Target stock remains a buy. Yes, investors could have bought TGT at a lower PE and a higher dividend yield early this year. However, it still trades at a huge discount to Walmart and Costco while paying a higher dividend yield.
The 20%-plus move in about a month could indicate a near-term pullback will come soon. Still, for now, investors can profit from a still-generous dividend. Although traders may need to exercise patience, I think the journey higher has only just begun for Target stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.