Target: How To Profit From Their Current Calamity

Most of my positions are long-term investments. I like to imagine myself like a lion, prowling the S & P savannah, looking for the lame and weak. Right now, I'm crouched in the high grass with my other predatory friends (that's you). Look! Here comes Radio Shack (RSH)! It's true that Radio Shack is lame, but with six of the last seven quarterly statements reflecting losses and a one year EPS growth rate (if you can call it that) of negative 314, uh, uh. That thing has a disease. Heck, we're predators, not scavengers! If we gobble that thing up, we might get sick.

Hey, there's Francesca's Holdings Corp (FRAN). Nice looking little doe. But we didn't become Kings of the Jungle by taking down little does. We need something with meat on its bones.

Wait! Here comes Target (TGT) limping along! Looks tasty!

Maybe you took some of your profits, flew off to a remote part of Kenya for your first safari, and camped in some backward place without access to a TV or phones. If you did, it might be news to you that Target suffered a security breach involving 40 million credit and debit cardholders. For the overwhelming majority of investors, however, any questions concerning Target probably revolve around the possibility of an investment opportunity materializing in the near future. My intent is to analyze previous security breaches of this type and to attempt to determine a good entry point for acquisition of a great company suffering through momentary difficulties.

The Woes of TJX Companies, Inc.

On January 17, 2007, TJX Companies, Inc. (TJX), probably most familiar to you through their Marshall's and T.J. Maxx retail stores, suffered a similar security breach. Initial estimates of the number of accounts involved stood at 90 million, but once the dust settled, it appeared as if a more modest 45.6 million accounts were compromised (a number similar to Target's 40 million) .

A variety of class action law suits resulted in TJX offering free credit monitoring services and free credit insurance to affected customers, issuing one or two (depending on the client) $30 vouchers to customers, paying the cost of replacing Driver's Licenses and hundreds of millions in payments to a variety of credit card companies.

It's interesting to note that at the time, TJX executives issued a number of statements to the public downplaying projected losses associated with the incident.

A review of TJX financial statements following the breach could be characterized as taking a picture of a company hitting a speed bump. For example, from calendar year 2006 to calendar year 2007, one observes a reduction of cash on hand of $733,000,000 to $454,000,000 and a reduction of net income from 4.5 million to 4.1 million. Hardly a catastrophic turn of events. In calendar year 2008 and beyond, TJX financial statements reflect very positive increases.

Estimates of TJX losses associated with the debacle range from $1.6 billion to $8.6 billion.

IPLocks, a compliance and database company, estimated eventual losses of $100 per lost record, or $4.5 billion.

Forrester Research estimated incidents of this nature result in losses of 90 to 305 dollars per compromised account.

The Ponemon Institute estimated losses of $182 per record breach (over $8 billion). Ponemon Institute conducts research which attempts to quantify all losses associated with security breaches, including customer churn rates. The Ponemon Institute's most recent studies indicate the average loss per customer at $204 for incidents occurring in 2009.

To place these losses into their proper perspective, Target had yearly net income in 2013 of roughly $3 billion. It is reasonable to assume, considering the outcomes of similar events, that the losses will occur over a number of years. It is also a logical assumption, viewing Target's greater resources vis a vis TJX, that the former company will be able to easily weather the storm.

Although the monetary losses Target will likely experience is of great concern to the potential investor, it is instructive to view the movement of TJX stock following the incident.

· The day before TJX revealed their security breach to the public (01/17/07), the stock closed at $14.97

· The stock traded with average volume at prices between $15.12 and $14.65 before closing at the end of that trading week at $14.75.

· For the next three trading days, the stock traded on average volume and closed between $14.69 and $14.79.

· The month of February opened with TJX trading at volume three to four times normal. The stock closed that day at $14.24.

· After February 1st, TJX generally declined until it bottomed at $13.00 on 03/14/2007. Volume was about 2x normal that date.

· On 04/16/07, following gradual price increases, TJX closed at $14.17, six cents higher than the day before the announced security breach.

· On 09/19/07 TJX closed at $15.93.

· TJX finished the year at $14.36.

· TJX closed today (12/26/13) at $63.65

HEARTLAND PAYMENT SYSTEMS, Inc.

A similar situation occurred on 01/20/09 with Heartland Payment Systems, Inc. (HPY). HPY provides bankcard payment processing services to merchants in the United States. On that date, HPY announced a data breach of 100,000,000 accounts. By 2010, HPY had paid over $140,000,00O to resolve several lawsuits and additional suits were pending.

· HPY traded at 14.18 the day before their public statement concerning the incident (01/20/09).

· On 01/22/09 HPY dropped precipitously to $8.18. I attribute the greater proportional losses suffered by HPY to the fact that their only business is bankcard payment processing.

· After 01/22/09 HPY traded in the low $8 to low $9 range until 02/17/09 when it closed at $7.75.

· On 02/24/09 HPY dropped from $7.65 to $5.34.

· The stock traded in the mid $5 range until 03/06/09 when it fell to $4.39.

· HPY bottomed on 03/09/09 at $3.78.

· HPY hit $5.06 on 03/16, $6.01 on 03/25, $7.02 on 03/26, $8.09 on 04/09, $9.05 on 05/05, $10.15 on 07/24, $11.33 on 08/19, $12.50 on 08/21 and $13.25 on 09/14.

· On 09/14/09 HPY closed at $14.08, ten cents below the price set the day before the announcement of the security breach.

· HPY closed today at $49.87.

I caution readers of this article in that a study of two stocks is an obviously small sample size and the correlation between the movements of TJX and HPY could be coincidental.

It is interesting to note, however, that TJX bottomed approximately eight weeks after announcing their security breach while HPY bottomed roughly six weeks after their disclosure. The bottom TJX hit represented a drop of approximately 12%.

I believe the study of TJX holds some value as TJX and Target are retail companies and TJX faced circumstances similar to Target's current problem. Although Target's security breach is serious, I am confident Target will rebound from this incident.

I'm watching Target closely hoping for an opportunity to make a long term entry point when the stock is at an artificially depressed price. Prior to this study, I had assumed a longer period was needed before I initiated a position; however, I may very well reconsider that notion.

For those considering purchase of Target anytime in the near future, I strongly recommend you read my recent article, Wal-Mart Vs. Target: Where the Real Difference Lies. I point out in that article certain difficulties Target is experiencing in their current operations.

In summation, my knee-jerk reaction was to assume a longer time period before acquiring a position in Target. From the perspective of my personal investing style, I now believe a period of one to two months and a price loss of ten to fifteen percent ($57.00 to $54.00) is a logical entry point. As a long-term investor, I would rather purchase at $57.00 and suffer a possible paper loss, versus waiting for a better price that may never materialize. I will admit; however, that a technical reading of the stock (which indicates a downward trend at the moment) could affect my entry point.

And last but not least, good hunting!

Source: Target: How To Profit From Their Current Calamity

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.