Target Financial Analysis Essay

Target Corp. started in 1902 as Dayton’s Dry Goods company. At 1911, Dayton’s Dry Goods is renames as Dayton Company, and commonly known as Dayton’s Department Store. In 1946 Dayton’s Department Stores started giving the community back 5% of their pre-tax profits, a practice that Target Corp still maintains. During the 1960s Dayton’s create a new kind of store to appeal to the masses called Target, opening the first Target store in the Twin Cities on May 1, 1962.

The industry sector in which Target Corporation competes is in the retail sector reaching $62. 7 Billion in sales. As mentioned above, Target competes in the retail sector, which makes the operating risks of the company mainly focused on customer’s perceptions, differentiation of brand, and anticipating consumer preferences to boost their sales, gross margin, and profitability. If we take a look at Target’s 10K, the first risk factor they mention is the ability to differentiate the business from other retailers by creating attractive value propositions through a careful combination of price, merchandise assortment, convenience, guest service, and marketing efforts.

Another risk that all companies in this sector face are the macroeconomic condition of the country and the impact this has on their consumers. This leads us to the financial risk the company might have. One of the financial risks we have to consider in any type of company is the debt to total capitalization ratio. Based on the financial information of their 2011 report, we can calculate the debt to total capitalization ratio in the following manner:

Total debt: 15,726 million

Total stockholder’s equity: 15,487 million, therefore: 15,726 / 31,213= 0. 50 or 50%

Comparing their debt to total capitalization ratio with the industry average, Target’s is too high. The industry debt to total capitalization ratio is 0. 36. Comparing the financial information of previous years Target went from 0. 58 in 2009 to 0. 52 in 2010, to 0. 50 in 2011. Overall, Target is improving significantly their debt to capitalization ratio, but still has some work to do. In regards to Target stock, currently, they don’t have any preferred stock outstanding, just common stock. Target’s common stock is traded in the NYSE as TGT. The price of its common stock as of today is $62. 0, going up 0. 06 points. Target’s cash dividend yield on the Common Stock is 0. 0192 = 1. 92% = 2. 0: Cash dividends declared per share: $1. 20 Current stock price: $62. 50 Cash dividend yield= 1. 15 dividends declared/ 62. 50 stock price = 1. 92 = 2. 0 Target’s market capitalization is: 668. 4 million shares issued and outstanding x $62. 50 of stock prices = 41. 8 Billion Continuing with Target’s capital structure if we look at Target’s liabilities section: Short portion of Long-Term Debt = $3. 3 Billion Long-term debt = $15. 2 Billion Therefore the total debt for Target would be: 3. 3 B + 15. 2 B = 18. 5 Billion Dollars.

Taking the previous calculation of Target’s market capitalization of 41. 8 the total capitalization would be: 18. 5 B + 41. 8 B = 60. 3 Billion, or: 31% Debt 69%.

Equity As of November 18, 2012, Target’s current beta is 0. 48. Now if we would like to calculate what would be Target’s new beta without the long-term debt (unlevered beta) we need to use the Hamada formula for the unlevered beta bu= b/ [1 +(1-T)(D/S) bu= 0. 48 / [ 1 + (1-34. 3%) (18. 5/40. 6)] bu= 0. 37

If Target would not have any long-term debt, its beta would be of 0. 7. Moving to Target’s current Marginal Tax Rate, according to the Income Statement found at Target’s annual report, the rate is 34. 3%. In order to calculate Target’s Cost of debt before and after taxes, we need to look for the bonds issued by a corporation. Since Target has not issued bonds, I took the cost of long-term debt due in 2020 as my example. The rate of that long-term debt is 3. 875%. This would be the cost of debt before any taxes are taken. Now to calculate the Cost of Debt after tax, we need to proceed with the following calculation: 3. 875 ( 1 – 34. %) = 2. 545875

As mentioned before, Target doesn’t have any preferred stock. We can calculate the Cost of Equity using the Risk-Free Rate of 3. 00% and a Risk Premium of 7. 5% points. Using the new beta of 0. 48 we can determine what is the Expected Total return by Common Stockholders:

rRF = 3. 00

rRP = 7. 5 b= 0. 48

Cost of Equity = rRF + (rRP x b) =3. 00% + (7. 5% pts x 0. 48) = 0. 066 = 6. 6%

Given the dividend yield of 2. 0 we can also determine the Expected annual appreciation of Target’s Common Stock: 6. 6% Total Return – 2. 0 Dividend Yield = 4. 0% of E. A. A. With the previous information calculated we could proceed and calculate the Weighted Average Cost of Capital:

wd = 31%

ws = 69%

rs = 6. 6%

rd = 3. 875%

Tax = 34. 3 WACC = wd ( 1 – T)rd + ws(rs) =31% ( 1 – 34. 3%) 3. 875% + (69% x 6. 6%) = 0. 053432 = 5. 3432%

One of the last things used to evaluate in order to consider investing in a company is its Price Earnings Multiple. Target’s Price-Earnings Multiple is calculated in the following way:

Stock Price= $62. 50

Earnings Per Share = $4. 50

P/E = Stock Price / EPS = 62. 50 / 4. 50 = 13. 89

If we compare Target’s P/E ratio with Wal-Mart, which is in the same industry, (14. 03 P/E), Target’s P/E is within the industry. http://finance. yahoo. com/q/bc?s=TGT+Basic+Chart&t=5y This chart was retrieved from Yahoo! Financial. Here we can see the performance of Target’s Stock (TGT) during the past five years. In 2008 Target’s started at approximately $55. 00; looking at 2009, the stock plummeted from the ’60s to the mid-’20s, which reflects the market crash. After this episode in the economy, we can see that Target’s stock has recovered significantly.

After performing the calculations, Target’s capital structure is optimal. However, the debt to capitalization ratio is high, at 50%. Target needs to lower its Long-Term Debt. Comparing Target’s debt to capital to the industry average, the industry average is 0. 36. However, I would invest in Target. I think I would have an advantage over outsiders because I used to work at Target Corporation. Target is a company that is constantly growing, and its sales demonstrate their market advantage over other retailers. What convinced me to invest in Target mostly was the P/E ratio.

Comparing it to a corporation like Wal-Mart, which is really successful, Target’s P/E ratio is acceptable and attractive.

References:

1. Scovaner, Douglas A. (2011). Target 2011 Annual Report. Retrieved on November 18, 2012: https://corporate. target. com/annual-reports/2011/images/company/annual_report_2011/documents/Target_2011_Annual_Report. pdf
2. Stock Analysis on net. (2012). Retrieved on November 18, 2012. http://www. stock-analysis-on. net/NYSE/Company/Target-Corp/Ratios/Long-term-Debt-and-Solvency#Debt-to-Capital
3. Retrieved on November 18, 2012 http://ycharts. com/companies/TGT/pe_ratio
4. Yahoo! Finance. (2012). Retrieved on November 18, 2012. http://finance. yahoo. com/q/bc? s=TGT+Basic+Chart&t=5y
5. https://corporate. target. com/annual-reports/2011/images/company/annual_report_2011/documents/Target_2011_Annual_Report. pdf, page 5.
6. http://www. stock-analysis-on. net/NYSE/Company/Target-Corp/Ratios/Long-term-Debt-and-Solvency#Debt-to-Capital
7. https://corporate. target. com/annual-reports/2011/images/company/annual_report_2011/documents/Target_2011_Annual_Report. pdf,
8. http://ycharts. com/companies/TGT/pe_ratio