Target operates large-format general merchandise discount stores in the United States, which include Target and SuperTarget stores. Target Corporation offers both everyday essentials and fashionable, differentiated merchandise at exceptional prices. It has a strong supply chain and technology network and operates as a single business segment. Target’s credit card operation represents an integral component of the core retail business. Through the branded proprietary credit (or REDcard) products, Target strengthens the bond with the guests, drive sales and contribute to earnings.
Target also operates Target. com, an online business. The online business is small relative to the overall size, but is growing at a much more rapid annual pace than the stores. Target is in the industry of Discount, Variety Stores. Its market capital is 39. 7B. Its largest competitor, Walmart and Costco, have market capital of 196. 7B and 26. 9B, respectively. The rest companies in the same industry such as Dollar General Corporation, Dollar Tree, and Bit Lots Inc. take only 10% of the total market capital. Target Corporation has stably growing revenue.
In 2009,2008,2007,2006, the revenue increased by 12. 88%, 6. 2%, 2. 3%, and 0. 87%, respectively. The Earning Per Share is $3. 31,$2. 87, $3. 37, $3. 23, $2. 73,$2. 09 respectively. The Dividend Per Share is $0. 67, $0. 62,$0. 54,$0. 46, $0,38,$0. 31 respectively. |Financial Results: (millions)|2009 |2008 |2007 |2006 |2005 |2004 | |Total revenues | |Effective Tax Rate |0. 35 | |Debt Ratio |40% | |Growth of Sales (post-2009) |5. 7% | |long Term Growth (>=2010) |3. 00% | |WACC(= E/(D+E)*Re + |8. 70% | |D/(D+E)*Rd*(1-t)) | | |Rm |10. 00% | |Rd |10. 54% | |Re |9. 94% | |Rf |4. 00% | |Beta |0. 99 | [pic]
In the Economic Profit Model, the average ROIC is calculated as 15. 19%. The model discounts the economic profit in each period with WACC. Using the same WACC with the FCF valuation model, the Economic Profit model returns the firm value of $19428. 17563 million. The value per share is estimated as $26. 93/share. |Key Factors For Economic Profit Valuation Model | |Effective Tax Rate |35% | |? ROIC |15. 19% | |WACC |8. 0% | |long Term Growth (>=2007) |3% | In the Residual Earning Model, the ROE is 18%. This model discounts the future residual income with WACC and then adds the initial book value of firm. Using the same WACC as the Free Cash Flow model, the mode returns a firm value as $34610. 8394 million. The value per share is estimated as $47. 97/share. |Key Factors For Residual Earning Model | |Effective Tax Rate |35% | |ROE |18. 0% | |WACC |8. 70% | |long Term Growth (>=2007) |3% | After the valuation, sensitivity test has been conducted against the Free Cash Flow model. Because of the nature of Free Cash Flow discounting model, the growth rate has to be less than the WACC. Further, in the past five years, Target Corporation’s average growth rate was around 5%. In the sensitivity test, the firm value was tested against different growth rate. The growth rate of sales was changed from -2% to 7%.
As the result, the firm value increases as the growth rate increases. |Growth of |Firm Value(M) |Firm Value With Debt(M) | |Sales | | | |7 |172779. 0051 |127560. 5766 | |6 |80082. 4418 |86257. 2818 | |5 |61082. 59808 |67257. 43808 | |3 |217701. 9832 |49244. 0832 | |0 |31,571. 79258 |37746. 63258 | |-1 |29,319. 03885 |35493. 87885 | |-2 |27,487. 21273 |33662. 05273 | The long-term debt/equity ratio of Target Corporation fluctuates from 69%to 108. 84%. So the sensitivity of firm value was tested against the long-term debt/capital ratio. The result is that the higher the debt ratio is, the higher the firm value is.
However, as discussed before, According to the Key Industrial Financial Ratio U. S. Industrial Long-Term Debt table, a company whose ratio is ranked as A has the long-term debt/capital ratio and Total debt/Capitalization of 33. 9% and 42. 5% respectively. Thus, 40% of the debt ratio was used for valuation model for Target . |Debt Ratio |Firm Value(M) |Firm Value With Debt(M) | |25% |39962. 87253 |43822. 15 | |30% |40945. 14664 |45576. 28 | |35% |41979. 0602 |47382. 29 | |40% |43069. 56832 |49244. 41 | |45% |44220. 62094 |51167. 32 | |47% |44699. 2138 |51954. 65 | |48% |44942. 58065 |52352. 39 | |50% |45437. 68841 |53156. 24 | |60% |48093. 94101 |57356. 2 | 2. Corporate Finance Strategy Target Corporation is having a very stable financial policy and dividend policy.
From the historical financial data, Target had debt $11,044M, $11,202M, $10,599M, $17,471M, and $19,882M in the year of 2005,2006,2007,2008, and 2009 respectively. The long-term debt/equity ratio rises from 69. 34% to 108%. Target’s bond has been rated within A plus and A categories. (http://investors. target. com/phoenix. zhtml? c=65828&p=irol-newsArticle&ID=1051094&highlight), (http://www. reuters. com/article/idUSN1336407420070913). Again, from the Standards & Poor’s ratings report, the companies rated in AA and A have the long-term debt/capital ratios and Total debt/capitalization ratios at about 28. %, 37. 7%, 33. 9% and 42. 5%. Thus the debt used in the valuation must be compliant with the rating of Target. The debt ratio must be between 28. 2% and 42. 5%. The lower the debt rating, the higher interest rate Target must pay for its long-term debt because of the higher default risk. [pic] As the sensitivity test result, the higher the debt ratio, the higher firm value is. Thus the Target Company needs to take the debt ratio that can maximize the firm value. 40% of Total debt Capitalization ratio would maximize the firm value as $43069. 56832 million.
As the financial analyst, I would recommend the debt-equity structure as 40%-60% to maximize the firm value. The Target Corporation gave $0. 38/share, $0. 46/share, $0. 54/share, $0. 62/share, and $0. 67/share for the year of 2005, 2006, 2007, 2008 and 2009. Although the economy went down in 2009 and the gross margin ratio of Target went down also, Target Company kept increasing the dividend/share. Target Corporation has given the investors much more confidence than other sectors in the capital market although general level of Target’s dividend yield (0. 72%-1. 37%) is a little bit lower than the industry level (2. 0%). As the financial analyst I think the current dividend policy is appropriate because it keeps enough cash for the company’s operation but keeps the investors’ confidence at the same time. As the investors of the Target Corporation I might want the company to give out same level dividend as the other companies in the same industry. The dividend could be increased to $1. 00/share. Target has a higher Net Income/Sales ratio (3. 92%) than the industry level (3. 50%). Furthermore, Target’s income statement shows that Target keeps the high cash flow at the end of each year. 009’s cash at the end of the years was especially high. Target could offer better dividend policy without affecting long-term business operation. 3. Investment Recommendations Target Corporation’s stock price was constantly ranged from $45/share to $65/share from 2004 to 2008. In the year of 2009, Target’s price decreased to $27/share due to the adverse economy situation. After 2009, the price gradually comes back to the $55/share. Target is having a mature business in the mature industry sector- Discount, Variety Stores. The stock price seems to have a strong ability of maintaining its price level.
PE ratio went down from 19. 56 to 9. 44 and then come back to 14. 85. I would recommend the investors to buy the stock of Target Corporation and hold it in the portfolio since this stock has stable performance and stable dividend every year. Target is a necessary stock for build up a risk-averse portfolio for a risk–aversion investor. Considering Right now the U. S stock market are still in a relatively low level, the stock with stable dividends such as Target should be a stock most worth of invest. I strongly recommend to buy this stock in the portfolio. pic] My investment recommendation is not different from the analysts’ opinion. Finance. yahoo. com provides the professional analysts’ opinion on this stock. Basically in this month, November 2010, there are 9 strong recommendation for buy and 8 recommendations for buy. There are 7 hold and no sell. In the past three month, the recommendations have appeared the same pattern. There are opinions of strong-buy, buy than hold. There is no recommendation for Under-perform or Sell. |Recommendation Trends | | |Current Month | |Last Month | |Two Months Ago | |Three Months Ago | | | |Strong Buy | |9 | |9 | |9 | |9 | | | |Buy | |8 | |9 | |10 | |10 | | | |Hold | |7 | |6 | |5 | |5 | | | |Underperform | |0 | |0 | |0 | |0 | | | |Sell | |0 | |0 | |0 | |0 | | | Data provided by Thomson/First Call 4. The Impact and Implication of Financial Crisis on Target’s Financial Performance Target Corporation has faced severe economic downturn since 2009. Target’s stock price, sales and net income has been deeply affected. Target’s business is affected by a variety of risks. The most important factor for Target is its ability to remain relevant brand to its guests and build up a trustable brand. Target’s success depends on its ability to positively differentiate itself from other retailers. The retail business is highly competitive.
In the past it has differentiated itself by creating an attractive value proposition through a careful combination of price, merchandise assortment, convenience, guest service and marketing efforts. The risks that Target is facing have the following factors: 1. If Target fails to anticipate and respond quickly to changing consumer preferences, the sales, gross margin and profitability could suffer. 2. All the Target stores are located within the United States, making it highly susceptible to the adverse U. S. macroeconomic conditions and consumer confidence. 3. Target’s inability to build new stores in suitable locations could slow the growth. But the difficulty in building new stores could increase the costs and capital requirements. 4. Target is depending on huge amount of suppliers for the daily business operation.
The downturn of economy have interrupted its supply chain and adversely affected Target’s business operation. 5. Target has depended on a stable, liquid and well-functioning financial system to fund operations and growth plans. In particular, Target has relied on the public debt markets to raise capital for new store development and other capital expenditures. It relied on the commercial paper market and bank credit facilities to fund seasonal needs for working capital. It relied on the asset-backed securities markets to partially fund the accounts receivable portfolio. Furthermore, target uses a variety of derivative products to manage the exposure to market risk, principally interest rate and equity price fluctuation.
Obviously the economic turmoil in 2009 has severely affected Target’s capital requirement. The financial market’s downturn also affected Target’s capability of funding the working capital needs and led to looses on derivative positions resulting from counterparty failures. 5. Conclusions In concluding section, please summarize: (i) the key findings and contributions of your findings, and (ii) the key learning outcomes such as new ideas, concepts, implications, and learning outcomes from the research. From my research, Target Corporation, as the second largest retail store in the industry of Discount, Variety Stores, is performing very well in the turmoil economic environment of U. S.
It has stable growing revenue, stable stock price and healthy financial positions. It is a safe stock for the investors in the public capital market. However Target itself is having very conservative growth plan, and conservative dividend policy. The valuation models in this research indicate that Target is actually being undervalued in the FCF model. In the economic profit model and the residual earning model, firm value and stock price has been overvalued. However the result of residual earning model is much closer to the FCF model. The recognition of value is different. The EP model undervalues the firm probably because this model involves the asset (invested capital) of the firm.
It counts the firm’s beginning invested capital as negative cash flow. That is why the result is much lower than other two models. It is interesting that Target is having a variety of financial instruments including internal funding and external debts, financial derivatives to support the need of capital. How to hedge against the current financial crisis is a on going question for Target’s management team. However all in all, target would be a very nice investment for the investors. REFERENCES: Finance. yahoo. com Http://www. reuters. com/article/idUSN1336407420070913) Http://e-articles. info/e/a/title/Methods-for-Discounting-Cash-Flows-and-Resid