Is Target Stock a Bargain After a 31.8% Slide Despite Solid Cash Flow Outlook?

• If you have been wondering whether Target at roughly $93 a share is a bargain or a value trap, you are not alone. This article is here to walk you through that question step by step.
• Despite a modest 3.0% gain over the last week and 3.2% over the past month, the stock is still down 31.8% year to date and 28.1% over the last year. That combination makes it look like a potential recovery story with a side of risk.
• Recent headlines have focused on Target navigating shifting consumer spending patterns, inventory clean ups, and ongoing competition from online and big box peers, all while trying to keep traffic coming through promotions and revamped merchandising. Together, those themes help explain why the market has repriced the stock and why sentiment is still cautious.
• Even so, Target currently scores a 5/6 valuation check score, suggesting it screens as undervalued on most of the key metrics tracked in that framework. Next, this article will unpack those traditional valuation approaches before finishing with a more holistic way to think about what the stock might be worth.

Find out why Target's -28.1% return over the last year is lagging behind its peers.

Approach 1: Target Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a company is worth by projecting the cash it can generate in the future and discounting those dollars back to today. For Target, the model uses a 2 stage Free Cash Flow to Equity approach built around cash flow projections.

Target generated about $2.9 billion in free cash flow over the last twelve months. Analyst forecasts and subsequent extrapolations suggest free cash flow will fluctuate but ultimately grow to roughly $3.8 billion by 2035, based on a mix of explicit analyst estimates through 2030 and Simply Wall St extrapolations thereafter.

When those projected cash flows are discounted back into today’s dollars, the model arrives at an intrinsic value of about $135.30 per share. Compared with a recent share price around $93, this implies the stock is roughly 30.8% undervalued on a cash flow basis.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Target is undervalued by 30.8%. Track this in your watchlist or portfolio, or discover 900 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Target.

Approach 2: Target Price vs Earnings

For profitable companies like Target, the price to earnings ratio is a practical way to gauge what investors are paying today for each dollar of current earnings. The higher the expected growth and the lower the perceived risk, the more investors are usually willing to pay, which translates into a higher, but still justifiable, PE ratio.

Target currently trades on a PE of about 11.3x. That sits well below the broader Consumer Retailing industry average of roughly 21.6x and also below a peer group average of around 28.1x, suggesting the market is applying a sizeable discount to Target’s earnings relative to many competitors.

Simply Wall St’s Fair Ratio framework estimates a PE of about 19.4x for Target, which is the multiple you might expect given its earnings growth profile, risk factors, margins, industry and market cap. This is more tailored than a simple comparison with peers or industry averages because it adjusts for company specific characteristics rather than assuming all retailers deserve the same multiple. Compared with that Fair Ratio, Target’s current 11.3x PE looks materially low and indicates potential undervaluation on an earnings basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1447 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Target Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simple, story driven views where investors connect their expectations for a company’s future revenue, earnings and margins to a financial forecast, a fair value, and ultimately a buy or sell decision, all within the Narratives tool on Simply Wall St’s Community page that millions of investors already use.

Do you think there's more to the story for Target? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com