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This assignment asks you to use the techniques to evaluate a potential investment opportunity.

INSTRUCTIONS TO CANDIDATES
ANSWER ALL QUESTIONS

This assignment asks you to use the techniques to evaluate a potential investment opportunity.

Specifically, it asks you to use the data provided with this assignment to determine how much you would be willing to pay for one share of stock in Target Corporation (TGT), and to reflect on the factors that influenced your decision.

 

The company’s financial data has been provided for you in the spreadsheet that goes with this assignment; I will be attaching it to this task.

The spreadsheet also contains estimates for the company’s fiscal year 2024 earnings, dividends, and share repurchases that you will be asked to use in your analysis.

The document below also offers a bit of history and background on Target in order to help you form an opinion.

 

Please use the spreadsheet provided with this assignment to complete your analysis, and write up your conclusions in a brief memo of NO MORE THAN 1 page (single-spaced).

Both the spreadsheet and memo should be turned in.

 

 

Background

 

Target (TGT) is the seventh largest retail chain in the U.S. It operates a chain of general merchandise stores across the country which offer cost conscious, trend-focused products across multiple categories, including clothing, household goods, electronics, and groceries.

Its carries a number of popular private-label brands including Threshold furniture, Cat & Jack children’s clothing, and Good & Gather food & drinks and has partnerships with vendors such as Disney, Apple, and Ulta Beauty.

The company experienced notable revenue growth in 2020 & 2021 as customers shifted their shopping towards Target in the early pandemic years, but its growth has recently

 

slowed, and Target had several high-profile store closures last year as it struggled with

excess inventories, organized theft, and boycotts.

Management is currently targeting same-store revenue growth of 0%-2% and expects profit margins to continue recovering from their 2022 lows. The company remains significantly more profitable than industry averages in spite of its recent challenges.

Investors have differing opinions on what we will see from Target this year and there is currently a wide range of estimates for 2024. Current estimates for 2024 are as follows:

Expected Earnings Per Share (EPS) in 2024: $9.00-$10.27

The company’s dividend is currently $1.44 per share in 2024, and typically produces enough cash flow to pursue share repurchases as well.

Our forecasts currently predict a weak recovery in the coming year, and sustainable growth of 3.5% in the longer term. Investors will be watching the next quarterly report closely to see whether the company is able to resume revenue growth.

 

Step 1: Analysis

 

In order to form an opinion of this stock, please take a moment to review the financial data provided in the spreadsheet and complete the highlighted ratios for 2024 on lines 104-151.

Historical Financial Data for the years 2019-2024

Forecasts & Cash Flow Estimates for 2024

Ratio Analysis & Market Value Data

(with peer estimates for comparison)

 

Begin by and by making some observations:

 What conclusions can you draw about this company’s profitability, growth, or risk

by examining the ratio analysis section on lines 104-134?

 What conclusions can you draw about this company’s market value by examining the

Price/Earnings & Price/Book Value ratios on lines 137-152?

 Do the forecasts in this spreadsheet seem reasonable to you? If not, what concerns do you have and what do you think we should change?

 

Take a moment to reflect on your observations before you move on.

 

Step 2: Estimation

 

Now use the space provided at the bottom of the spreadsheet to estimate how much you would be willing to pay for this stock based on the estimates you’ve been given for 2024:

 Part 1: Dividend-Based Valuation

How much should we be willing to pay for this company if we expect the dividend to be $4.40 this year; believe that it will grow at a rate of 3.5% over time; and have a required rate of return on this investment of 9.2%?

Note: the information needed for this estimate is in the spreadsheet on lines 158-162.

 

 Part 2: A Broader Measure of Cash Flow

How would our estimate of the if we use dividends & share repurchases as our measure of cash flow, rather than dividends alone?

Note: the information needed for this estimate is in the spreadsheet on lines 168-172.

 

 Part 3: Earnings-Based Valuation

How much should we be willing to pay for this company if we assume that it should trade at an industry average P/E Ratio?

Note: the information needed for this estimate is in the spreadsheet on lines 177-189.

 

 Part 4 (optional): Produce Your Own Estimate

Is there another approach you think we should take to value Target? Or would you like to explore using the same techniques with different assumptions?

Feel free to produce your own estimate using any techniques and/or predictions that you would like to. If you would like to use this opportunity to explore the Trefis interactive valuation model that we looked at in class, you are welcome to do so. (Link: https://www.trefis.com/company?hm=TGT.trefis)

 

Take a moment to compare the estimates that you have produced above and think about which one you find most credible, and why. What conclusions, if any, can you draw about the value of Target based on these calculations?

 

Step 3: Drawing Conclusions

 

Look back through the analysis that you’ve done and think about what conclusions you want to draw:

Write a brief memo (no more than 1 page, single-spaced) that outlines your conclusions, making sure to address the following points:

How much do you think an investor should be willing to pay for 1 share of Target

(TGT) stock right now, and why?

How did your analysis of this company’s financial statements and/or ratios affect your conclusion?

How did your expectations for this company’s future earnings, dividends, & share repurchases affect your conclusion?

How did comparing this company against Industry Averages and/or Walmart (WMT)

affect your conclusions?

What would you be hoping for if you invested in this stock, and what would you be worried about, and what further research could we do in order to produce a more informed investment opinion on this stock?

 

As a reminder: please turn in BOTH your spreadsheet and memo.

 

(5/5)
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