Tuesday, March 3, 2020

Are Target Shares a Buy-the-Dip Opportunity?

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What’s happening: Target Corporation is scheduled to report its fourth-quarter results before the opening bell on Tuesday, March 3. Shares have been under pressure after the company preannounced disappointing same-store sales growth for the quarter.

What happened: Target’s shares have taken a hit over the last weeks, after the retailer preannounced weak comp sales in the all-important fourth quarter. The company reported comp growth of 1.4% for the key shopping period, missing its own guidance of 3%-4% growth and representing the lowest levels since the first quarter of 2018.

Despite this, Wall Street analysts have mentioned several reasons to be optimistic, saying that the current share price may represent an attractive entry point for investors.

  • The consensus revenue estimate stands at $23.45 billion, representing a 2% year-over-year growth.
  • The estimate for earnings is $1.65 per share, with 7.8% growth from the same quarter in the previous year.

Why it matters: Amid investor concerns, analysts have cited several reasons for optimism. Target had reported robust sales and profits for most of 2019, having witnessed the strongest customer traffic growth in more than a decade.

No doubt, the fourth-quarter same-store sales were disappointing, especially versus the 5.7% growth delivered in the fourth quarter of 2018. Despite the tepid comp growth, the retailer did not lower its earnings projections for the quarter. This indicates an improvement in profitability. The margin expansion, if achieved, comes at a time when other retailers have cited high pressure on profitability.

Moreover, Target’s comparable digital sales surged 19% during the shopping season, benefitting from same-day fulfillment services. The retailer was able to offer customers same-day in-store pickup, drive-up and same-day delivery due to its acquisition of Shipt.

Archrival Walmart also experienced weak holiday sales, so it’s not a company-specific phenomenon. Walmart also missed earnings estimates when it reported results on February 18. If Target can meet earnings expectations, investor sentiment may turn sufficiently positive to boost shares.

The retailer has also been opening stores in smaller locations and redesigning its stores. Target is also benefiting from attracting young consumers and offering them trendy and affordable home décor, fashion and other items.

How shares have performed so far: Target’s shares reached a record high of $130.24 in 2019. The stock has lost almost 20% year to date, having declined more than 4% over the past five trading days. The stock could have been a victim of the broader selloff in the market due to coronavirus fears. Analysts largely consider Target as a good buy for the long term, given that its dividend typically exceeds that of its competitors. Target is paying an annualized dividend at a 2.50% yield, easily surpassing Walmart’s 1.92% and Costco’s 0.89% yield.

What to watch: Target’s shares are prone to strong moves following its earnings reports. This may be the case of the eighth-largest retailer in the US meeting earnings expectations for the quarter. Investors also await comments from management around the impact of coronavirus on its business as well as its first official 2020 guidance.

The Markets Today

     

Investors will be watching the Australian dollar today, with the currency edging higher versus some of its peers on Monday.

Context: With signs of coronavirus easing in China, the risk-sensitive Australian currency has recovered slightly, having plummeted to an 11-year low on Friday. Comments from Jerome Powell related to rate-cuts late Friday also helped the Aussie gain momentum.

Details: The Australian dollar moved higher during the previous trading session, after falling initially on Monday.

China has been reporting a decline in the daily number of coronavirus cases. The Asian country confirmed 202 new infections on Monday, which is the lowest number since end of January. Tech giant Apple also announced the reopening of some of its plants in China.

Jerome Powell said on Friday that the central bank would “act as appropriate” to support the economy amid the risks posed by the coronavirus outbreak. Investors considered his comments as being indicative of the Fed cutting interest rates at its next scheduled meeting on March 17-18. There have been speculations of a rate cut being announced this week.

The US dollar has been supported by its yield advantage. However, this could shrink if the central bank cuts interest rates, as other countries like Australia, Japan and Europe have limited room for such cuts.

On the economic data front, Australia's new homes sales increased 5.7% in January, versus a 2% rise in the prior month. Building permits surprisingly dropped 15.3% in January. The country’s current account surplus shrank to A$1 billion in the fourth quarter, from A$6.50 billion in the previous quarter.

The AUD/GBP pair traded at around 0.512, while AUD/USD rose to 0.653 in the previous session.

Why it matters: Investors had been scurrying to safe-haven assets amid fears of the coronavirus impact on the global economy. With these fears slightly abated, investors are now widening their portfolio, which may have supported the Australian dollar. The Reserve Bank of Australia will announce its policy decision today. If the RBA cuts rates, the Aussie may come under pressure again.

What to watch: After an upbeat performance of the Australian dollar in the previous session, all eyes are on the RBA’s interest rate decision. With China being the Australia’s biggest trading partner, any report of a slowdown in the Chinese economy in the first quarter will hurt the Aussie.

Other Markets: Most European indices closed higher on Monday, with the FTSE 100 and CAC 40 up 1.13% and 0.44%, respectively. However, the German 30 declined by 0.27%.

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Turkey's annual inflation rate, producer prices and consumer price index, French government budget value, Spain’s unemployment change, Italy’s unemployment rate, South Africa’s GDP growth data, UK’s construction PMI, Eurozone’s unemployment rate, inflation rate and producer prices as well as the US Redbook index, ISM New York current business conditions index and IBD/TIPP economic optimism index.