Tuesday, June 24, 2008

Is Target’s current price a bullseye for value investors?

There are quite a few well-known value investors who have purchased shares in Target (TGT) recently. Current worries over the consumer slow down have taken the stock back down to levels below where most of them have bought. What kind of value might there be at these levels?

Target announced they’ve agreed to sell a 47% interest in their credit card portfolio to JP Morgan. Based on the sale price, Target’s remaining 53% is worth just north of $4 billion. They’ve also stated that they’ll complete about half of the $8.5 billion they have left on their buyback plan by the end of this year. Assuming they buy back at prices around $55 per share this year and the rest of the buyback (in ’09 and ’10) at around $70 per share, they should have about 700 million shares outstanding at the end of 2010. Taking out all revenue from the credit card portfolio and lowering margins a bit on the rest of the business, it seems reasonable that Target could make about $3 billion from their core business in 2010.

What could the shares be worth? Let’s do a quick back-of-the-envelope to see if it is worth looking into based on the following assumptions for 2010:

- $3 billion in earnings
- $4.5 billion value for their portion of the credit card portfolio
- 5% earnings growth for the 10 years after 2010
- 8-10% discount rates
- 12-15 terminal multiples

The above assumptions yield intrinsic values for Target at the end of 2010 between $72 and $92 per share (versus the current market price of about $48 per share). Target also owns about 85% of its real estate which helps provide some downside protection and maybe some potential upside not included in the above numbers. So, is Target worth looking into? That is a question you’ll have to decide for yourself!

*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.