Worries had hit shares of Target Co. (NYSE: TGT) as rising crime waves in some states where the brand has the most square footage, like California, created a headwind for future earnings. However, these fears seem to have been put to bed as the company released its second quarter 2024 earnings results, sending the stock higher by up to 14% in a single day on a positive reaction to the numbers.
In addition to this financial momentum, investors can be sure that the macro picture is also working for consumer staples stocks like Target, as seen in the resilient price performance of a peer like Costco Wholesale Co. (NASDAQ: COST), which still trades at 98% of its 52-week high. Even after the recent rally, Target stock only trades at 88% of its 52-week high, giving investors an opening in price action to see a bit more upside ahead.
More than that, Target's discretionary items segment also saw a slight improvement over the quarter, showing that the promise of interest rate cuts from the Federal Reserve by the end of 2024 could increase confidence in the consumer sector in the coming quarters. However, the value left in the company is found inside the financials for those who know how to look, so here’s a snippet.
Strong Financial Results Show Target Stock Firing on All Cylinders
Starting with the main key performance indicator (KPI) that most investors look for in every stock investment, earnings per share (EPS), Target showed that it is a stock that deserves to trade higher after the numbers it delivered.
A jump to $2.57 EPS represented an over 40% increase during the year, and that is enough to send any stock on a double-digit rally, but that’s now in the rear-view mirror; understanding what drove these earnings higher is what could help investors look to the road ahead to justify further upside.
Efficiencies and higher returns on capital mainly pushed these rising earnings. Gross margins jumped from 28.2% in 2023 to 30.1% this quarter, leaving more capital for management to reinvest into Target for growth and greater shareholder benefits.
Speaking of higher returns, here’s one measure that value investors like Warren Buffett look for: Return on invested capital (ROIC). ROIC for Target stock grew to 16.6% this quarter, up from the 13.7% generated a year prior. This metric is important because it creates the compounding effect that most investors want to see from their investments.
The returns on capital can also be accredited to the rising operating margins at Target stock, which grew to $1.6 billion, or 36.6% higher than the year before. This is thanks to the investments in logistics and store renovations that allowed for better cost management and capacity for more business.
Since Target's management invested a further $1.3 billion over the past quarter, management felt confident pushing the company's future financial guidance higher for the rest of the year. This got the ball rolling for more buyers coming into the stock.
Raised Guidance and Analyst Targets Fuel a Bullish Future for Target Stock
Management raised sales guidance for the next quarter and for the full year 2024. The EPS guidance is also higher to justify a richer valuation for Target stock, one that a few Wall Street analysts got behind in this earnings season.
Analysts forecasting 12.8% EPS growth in the next 12 months for Target stock may have to revise these projections higher. Management expects a range of $9.0 to $9.7 EPS, which would be up by over 30% from the past 12 months' EPS.
Following that trend to higher valuations, analyst price targets could also see higher revisions. Right now, those at Telsey Advisory Group see a valuation of up to $190 a share for Target stock, daring it to rally by as much as 18% from where it trades today, even accounting for the double-digit earnings rally.
More than that, Legal & General Group (Target's largest shareholders) decided to boost their stake in the stock by as much as 6.8% as of August 2024, bringing their net investment up to $647.6 million today. However, Wall Street isn't the only one willing to back its bullish view on the stock.
Apart from raising guidance for the year, management also decided to repurchase some stock, allocating as much as $155 million from its share repurchase program. There is still $9.5 billion available to place toward buying back stock, which is roughly 13% of the company's market capitalization today.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
