"Street Critique"-Patrick O'Hare, Chief Market Analyst, briefing.com
Wednesday, June 18, 2008PAUL KANGAS: As pinched consumers curtail their discretionary spending, Target has been well off the mark and that has tonight's "Street Critique" guest taking a closer look at the stock. He's Patrick O'Hare, chief market analyst at the financial information web site briefing.com. Pat, welcome back to NIGHTLY BUSINESS REPORT.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Hi, Paul. Thanks for having me.
KANGAS: At briefing.com, you write the bargain hunting column where you look at stocks through a contrarian lens. Why has Target stock landed on your radar? O'HARE: Well several reasons. One is just that the stock is down considerably from its 52-week high, down about 30 percent at today's closing price. Also the stock is trading at a little over 15 times (INAUDIBLE) 12-month earnings. It's trading at about 40 percent discount to its 10-year historical average. And I would add that it's exhibiting some nice (INAUDIBLE) strength this year. It's up about 2 percent year to date which isn't great in its own right but it's certainly pretty good relative to the broader market.
KANGAS: Trades TGT the symbol on the big board, right?
O'HARE: That's correct.
KANGAS: Target's larger rival Wal-Mart appears to be benefiting from consumer belt tightening. Why is Target losing out here?
O'HARE: Well, Target caters primarily to the middle class consumer and obviously in the face of rising food and energy prices and falling home values, that consumer is trading down to the low-price leader Wal-Mart trying to stretch that dollar a little bit further. I would also add that the irony in Wal-Mart's out performance is it comes due to Target's past successes that have made for some easier comparisons from Wal-Mart. So Wal-Mart is doing a commendable job of servicing that consumer that's trading down as it lack (ph) some easier comparisons.
KANGAS: Are Target's current issues strictly driven by the current economic situation or is there something that management could be doing better?
O'HARE: We think it's primarily macro-related. The company is doing a really good job of managing expenses here. Add that inventory was up about 7 percent at the end of the first quarter. That was just ahead of the pace of sales growth. Also if you look at last year in 2007, sales were up about 6.5 percent, about half the rate of sales from 2006. Yet the company's operating margin only fell about 20 basis points to 8.3 percent. So we pin this issue primarily on the macro economy.
KANGAS: Will the fiscal stimulus checks that are going out and being received help the stock at all?
O'HARE: We think it certainly will. We think it will help the entire retail sector. But Target of course is a very recognizable leader in that space. It just stands to reason that that middle class consumer is going to feel some relief there as they get those stimulus checks and will head to Target to spend them.
KANGAS: OK, with the stock trading at around $51 a share, would you step in at these levels or are you waiting for it to go lower?
O'HARE: We do so somewhat cautiously. We wouldn't go all in right now but we think because of how much the stock has pulled back, that you could start to build a position here. I would add also that Target itself is buying its stock. It has an aggressive $10 billion share buy-back program. It aims to have about half of that program complete by the end of 2008.
KANGAS: Pat, do you own Target shares or have any other disclosure to make.
O'HARE: No, I do not.
KANGAS: All right. Very good, thanks for joining us once again.
O'HARE: Thank you, Paul.
KANGAS: My guest, Patrick O'Hare, chief market analyst at briefing.com.
