1. Relative Valuation
The valuation begins with identifying seven potentially comparable companies to assess Target Corporation. The potentially comparable companies are 1) Amazon Inc., 2) Costco Wholesale Corp., 3) Dollar General Corp., 4) Home Depot Inc., 5) Lowes Companies Inc., 6) TJX Companies Inc. and 7) Walmart Inc. While the selection is based on global industry classification standards and market capitalization, the assessment examines U.S. companies to better assess comparable operations to Target’s management of COVID-19 restrictions, regulations, and customer behavior.
2. Price to Sales Multiples
3. Key Value Drivers
4. Final Comparables
Key value drivers were applied to na
ow potentially comparable companies for assessing Target Corporation. Final comparable companies are 1) Amazon Inc., 2) Costco Wholesale Corp., 3) Dollar General Corp., 4) TJX Companies Inc., and 5) Walmart Inc.
5. Implied Total Equity Value
Part II - Historical Data for DCF Valuation
Works Cited
S&P Capital IQ XXXXXXXXXXTarget Corp., Amazon Inc., Costco Wholesale Corp., Dollar General Corp., Home Depot Inc., Lowes Companies Inc., TJX Companies
Inc., Walmart Inc.: Public company profile. Retrieved April 25, 2021 from S&P Capital IQ database.
1. Background
Target Corp., established as the discount division of the Dayton's Company of Minneapolis, MN in 1962, is the second-largest discount retailer in the United States. As of 2021, the company operates 1,897 stores across the US. Since April 2020, the company’s share price has outperformed the S&P 500 by 55%, thanks to its strong sales and earnings growth during the pandemic period. For example, the company has beaten analyst consensus sales and earnings estimates four quarters in a row since the first quarter of 2020. In particular, Target’s e-commerce sales growth has outperformed other retail peers such as Walmart and Home Depot, and its own delivery service, Shipt, and pickup services are getting traction.
Perhaps not surprising given these positives, the majority of the analysts recommend that the company’s equity will outperform the market.1 However, continued investment in the company’s e-commerce infrastructure, refu
ishing stores, and labor could put pressure on its operating margins going forward. Also, it is not clear whether the benefits Target has enjoyed during the pandemic would last in the medium to long run. Therefore, Target’s equity poses both potential challenges and opportunities to analysts and investors: On the one hand, the recent outperformance relative to the overall market as well as the retail peers might indicate that the company’s equity now fully reflects its fundamentals or is even potentially overvalued. On the other hand, Target’s equity may still offer an attractive investment opportunity, if the company’s future outlook for generating free cash flows and growth, given the risk, more than justify the cu
ent valuation. Therefore, the conclusion as to whether Target is an attractive investment should depend on your careful valuation analysis that incorporates its fundamental cash flow generating abilities and prices of the company as well as other comparable companies.