Target’s stable earnings sentiment drives analysts to expect slight growth of 3.12% in the coming 12 months, but it’s necessary to take a moment and evaluate this projection. Investors should consider the forces that are spurring this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, I will shine a light on the behaviour of Target’s margins to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.See our latest analysis for Target
What can we tell from TGT’s profit margin?
In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating TGT’s profit margin.
Margin Calculation for TGT
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 2.65 Billion ÷ 69.80 Billion = 3.79%
Target’s margin has contracted in the past five years, as a result of postive average revenue growth of 0.18% and decline in net income of -0.34% on average, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. TGT’s most recent margin of 3.79% appears to follow this trend, which suggests that the decrease in earnings has arisen due to difficulties in managiong costs as opposed to a lack of top line revenue.
Using Target’s margin expectations as a way to understand projections for the future
It is expected that margins will shift towards expansion, with an expectation of 1.83% in annual revenue growth and 2.08% earnings growth expected annually. This suggests the previous earnings stability is expected to transition in to stronger growth through enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. However, investors should realise margin expansion has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. In Target’s case, profit margins moving forward are forecasted to expand along with the margins in the Multiline Retail industry, and at the same time, TGT’s forecasted ROE of 24.69% exceeds that of the expected 12.96% ROE of the industry (note that this observation is also influenced by relative debt levels). This serves as an indication of the confidence amongst analysts covering that stock that the nature of Target’s earnings will result in a higher return per dollar of equity compared to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on Target’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For TGT, there are three pertinent aspects you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is TGT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TGT is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TGT? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!