Target Getting Acquired? Here’s How Much We Think It’s Worth

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There is much market speculation at the moment about Target (NYSE: TGT) potentially being acquired by Amazon (NASDAQ: AMZN), after prominent analyst Gene Munster prediced that Amazon’s next move could be its further expansion into the physical retail space with a takeover of Target this year. The analyst also noted that both companies share similar demographics, and with a potential deal, Amazon would benefit from over 1800 Target stores, as it could look to compete with Wal-Mart in the brick-and-mortar space.

Target’s shares rose by nearly 4% since Tuesday, likely in response to these reports. We have maintained our price estimate for Target around $59 (market valuation of $32 billion), which is now nearly 10% below the current market price. Here’s why we think that is still a fair value for the company at the moment.

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Target is looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, all at an estimated investment of $7 billion over the next 3 years. The company’s struggle to grow its comparable store sales has been the primary investor concern for the past few quarters, which was largely driven by declining traffic and lower average transaction amounts at its brick and mortar stores. So, Target’s future prospects seem to depend on management’s ability to execute, which is a fairly difficult factor to evaluate.

Although Target has had a better-than-expected performance so far – as both its revenue and earnings per share (EPS) came in ahead of market expectations in the first three quarters of 2017 – the company’s revenue grew just marginally and its earnings declined 6% y-o-y in the period. Factors such as higher employee wages, free delivery, and promotional activity continue to be a drag on Target’s bottom line. In addition, the retailer also expects to see continued pressure on its EBIT due to ongoing investments in both digital and physical stores going forward. In fact, the company has provided a disappointing outlook for the holiday season for the same reason. Our estimates for the company’s valuation assume a slight decline in Target’s revenue per square feet and gross profit margin levels going forward.

Our $59 price estimate for Target’s stock is nearly 10% below the current market price.

See our complete analysis for Target  

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