Here is a look at how Target (TGT) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $65 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $57 |
| Value Based on 0% Growth | $34 |
| Market Implied Growth Rate | 3.66% |
| Net Current Asset Value (NCAV) | -$27.01 |
| PEmg | 15.81 |
| Current Ratio | 0.90 |
| PB Ratio | 2.45 |
Balance Sheet - 10/31/2013
| Current Assets | $13,153,000,000 |
| Current Liabilities | $14,551,000,000 |
| Total Debt | $12,665,000,000 |
| Total Assets | $46,373,000,000 |
| Intangible Assets | $0 |
| Total Liabilities | $30,217,000,000 |
| Outstanding Shares | 631,760,000 |
Earnings Per Share - Diluted
| 2014 (estimate) | $3.44 |
| 2013 | $4.52 |
| 2012 | $4.28 |
| 2011 | $4.00 |
| 2010 | $3.30 |
| 2009 | $2.86 |
| 2008 | $3.35 |
| 2007 | $3.21 |
| 2006 | $2.71 |
| 2005 | $2.07 |
| 2004 | $2.01 |
| 2003 | $1.5 |
Earnings Per Share - Modern Graham
| 2014 (estimate) | $3.96 |
| 2013 | $4.08 |
| 2012 | $3.76 |
| 2011 | $3.45 |
| 2010 | $3.14 |
| 2009 | $2.99 |
Conclusion:
Target Corporation is a strong company that passes almost all of the requirements of the Defensive Investor, having only failed the current ratio test. By default, the company is also suitable for the Enterprising Investor. The company is achieving consistent growth while going from an EPSmg (normalized earnings) of $2.99 in 2009 to an estimated $3.96 for 2014. However, it should be noted that it appears the EPSmg may be dipping slightly in 2014 from its level in 2013. Assuming this historical growth rate continues, the company seems to be fairly valued by the ModernGraham valuation model, as the market is currently implying a growth rate of 3.66%, which is in line with the historical growth. As a result, Defensive Investors and Enterprising Investors should feel comfortable proceeding with further research to determine whether Target is suitable for their individual portfolios.
Disclaimer: The author did not hold a position in Target Corporation at the time of publication and had no intention of entering into a position within the next 72 hours.
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