First attempt at thoroughly researching a company. Wish I could I could attach the spreadsheets I made which more clearly display the financial ratios of Target and its main competitors (Costco & Walmart). I am by no way an expert, and any constructive criticism is valued, especially if there is something I failed to miss or fundamentally don't understand.
Strengths
- Target has a higher gross margin (26.32%) than its peers (Costco: 12.98%, Walmart: 25.10%). This means that the company retains more capital on each dollar of sales, which can be used to pay other costs or satisfy debt obligations.
- Target has an operating margin of 5.58%, meaning that each dollar earned in revenue brings 5.58 cents in profit. Because its operating margin is higher than its competitors (Costco: 3.16%, Walmart: 4.50%), the company a has a greater proportion of revenue available to cover non-operating expenses like paying interest.
- Target has a net profit margin of 3.89%, the highest of its main competitors (Costco: 2.40%, Walmart: 1.30%). A net profit margin of 3.89% means that for every dollar generated by Target in sales, the company kept about 4 cents in profit. Retailers tend to have profit margins that are lower than in other sectors, which can run between 0.5% and 3.5%.
- Target’s price-to-earnings ratio of 20.01 is relatively lower than its peers (Costco: 35.53, Walmart: 23.20) which suggests the stock is potentially undervalued among its main competitors.
- Target has the lowest price-to-book ratio (3.26) among its competitors (Costco: 8.50, Walmart: 3.80) which suggests its stock is undervalued. However, this alone shouldn’t be used to assess whether a stock is undervalued. It’s useful to consider the P/B ratio with the company’s ROE, as they both factor in the book value of equity. Because Target has a relatively low P/B ratio and a relatively high return on equity (25.47%), the company’s stock is likely undervalued.
- Target’s price-to-earnings-to-growth ratio of (2.48) is lower than its peers (Costco: 4.49, Walmart: 2.48), suggesting its stocks is more undervalued than its competitors.
- Target’s price-to-sales ratio of (0.50) is lower than its peers (Costco: 0.85, Walmart: 0.55) which suggests its stock is more undervalued than its competitors. Furthermore, when complementing the company’s low P/S ratio with its high net profit margin (3.89%), the same conclusion can be made.
- Target’s price-to-cash-flow ratio of (6.35) is lower than its competitors (Costco: 20.54, Walmart: 10.17). Although there is no single figure that points to an optimal P/CF ratio, a ratio in the low single digits may indicate the stock is undervalued
- Target’s relative low enterprise value to EBITDA of 11.25 (Costco: 20.06, Walmart: 11.37) indicates that the company may be undervalued
Good, but Not the Best
- Target has an interest coverage ratio of 9.15, meaning it has around nine times as much in EBIT (earnings before interest and taxes) as in debt interest. Although Target is more than able to cover their interest expense with their earnings, the company has the lowest interest coverage ratio among its top competitors (Costco: 32.15, Walmart: 9.67).
- Target’s return on assets (7.30%) is between its competitors (Costco: 8.49%, Walmart: 3.15%). Every dollar that Target has invested in assets generates 7.3 cents of net income, Costco 8.49 cents and Walmart 3.15 cents. This means that Target is better at converting its investments into profits compared with Walmart but not as good as Costco.
- Target’s return on equity of 25.47% is significantly higher than Walmart’s return on equity of 8.87% but slightly less than Costco’s return on equity of 26.10%. A return on equity of 25.47% implies $0.25 returned on every $1 invested. Target’s relatively high return on equity suggests the company efficiently uses its stockholders’ equity to earn profits.
- Target’s earnings per share of 5.56 is between Costco’s (8.32) and Walmart’s (2.28). With a higher earnings per share, we can assume that Target is performing better than Walmart in terms of profitability. This is also reflected in the gross profit margin and net profit margin
Weaknesses
- Target has the lowest quick ratio (0.20) among its peers, with Costco’s and Walmart’s quick ratios being 0.52 and 0.23, respectively. With a quick ratio under one, the company does not have adequate current assets to cover short-term obligations. However, this is not a significant issue, as the retail sector has traditionally had a very low quick ratio. Companies leading the retail sector typically negotiate favorable credit terms with suppliers due to their dominance over the market.
- Target’s receivables turnover ratio of 74.28 is much lower compared to its competitors (Costco: 95.32, Walmart: 86.48), indicating that the company’s collection of accounts receivables is inefficient, and that the company has a high proportion of customers that are either not financially viable or creditworthy. Whereas it takes a around four days for Costco and Walmart to collect its accounts receivables, it takes Target about five days to do so.
- Target has a significantly lower inventory turnover ratio (5.90) than its peers (Costco: 11.80, Walmart: 8.80) which means the company is selling goods at a slower pace and there is less demand for the company’s products. It takes Target approximately 62 days to sell its inventory on hand while it takes Costco about 31 days and Walmart about 41 days.
- Target’s asset turnover ratio of 1.88 is lower than its competitors (Costco: 3.54, Walmart: 2.43), signaling the company is not efficiently using its assets to generate sales. For every dollar in assets, Target generated $1.88 in sales, while Costco and Walmart generated $3.54 and $2.43, respectively. Target’s low turnover may indicate that the company is experiencing sluggish sales or obsolete inventory. Furthermore, its low inventory may also mean the company the company has lax collection methods.
The Bottom Line: In comparison to its peers, Target Corp. struggles to effectively use its assets and manage its liabilities in the short-term. The company’s collection of accounts receivables is inefficient, likely a result of lax collection methods, it sells goods at a slow pace, possibly due to less demand for its products, and the company may be holding obsolete inventory. With regards to liquidity, Target and its top competitors all have a quick ratio of less than one which would indicate that the businesses are not able to meet short-term obligations. However, this is not an issue, as large-cap retailers typically negotiate favorable credit terms with suppliers due to their dominance over the market. The company outshines its competitors in terms of profit-generating abilities. Target retains a great deal of capital on each dollar of sales, it has a large proportion of revenue available to cover non-operating expenses, and it keeps a considerable amount profit for every sale it generates after accounting for all expenses, costs, and cash flow items. Although not up to par with Costco, Target is better able to convert its assets and stockholders’ equity into profits than Walmart. Finally, when examining the company’s market prospect ratios, Target appears to be undervalued when considering its low market value ratios (P/E, P/B, PEG, P/S, EV/EBITDA).
TLDR: Overall Costco seems to be the best business to invest in with Target being a close second. That said, right now Target looks relatively undervalued in comparison to both companies.
Submitted January 25, 2020 at 09:42PM by augustopinochet101 https://ift.tt/3aHMvyp
