Target (NYSE: TGT) has published some fantastic results lately. Buyers have turned to its multi-channel shopping platform in droves during the pandemic, and the retailer has used its influence in the industry to gain market share by meeting demand for everything from basic necessities household items and clothing.
This additional activity also generates a level of profitability that seemed impossible as recently as 2019.
But is the stock a buy today or is it too expensive compared to peers like Walmart (NYSE: WMT) and Costco (NASDAQ: COT)? What if Target’s recent victories were just temporary side effects of the global pandemic?
Expensive for a good reason
There’s no denying that Target is expensive stock. It is the only one among its cohort of national retailers – including Costco, Walmart, Kroger (NYSE: KR), and TJX companies (NYSE: TJX) – by beating the market since the start of the pandemic. Its 90% rise in the past year means investors are pricing stocks at 1.2 times annual sales, which is close to a record premium. You could own Costco, a perennial Wall Street favorite, for less.
But Target stocks are expensive for good reasons. It has gained $ 10 billion in new market share so far during the pandemic through hard-to-replicate perks like unique commodities and convenient execution options. The chain started 2021 with a booming quarter, with sales up more than 20% from Walmart’s 6% rise.
Looking forward to
This strong start has led management to predict another year of sales growth after the 2020 surge. Any major slowdown from the pandemic lift may not begin to manifest until the end of 2021.
And the news is equally positive on the earnings front. Of course, CEO Brian Cornell and his team plan to invest money in the company to support the chain’s higher business footprint. The new business they attracted would normally require hundreds of additional stores to be built, after all.
But Target can still reasonably predict an operating margin of 8% this year. This measure had never reached this level before 2020 and was only 6% in 2019.
Why buy Target stocks
The big question for potential shareholders is whether Target is a fundamentally stronger company today than it was then. It’s clear that the investments the company made in previous years were the right ones to take advantage of a multi-channel retail world and strong consumer demand. Target still owns these assets, but it also has a larger business footprint and millions of very engaged new buyers.
Combined with its long history of dividend distribution, these growth gains make the stock a likely winner even after nearly doubling since late May 2020. If you prefer a retailer that is unlikely to experience big profits during recessions, you should consider Costco stocks. .
Yet Target today offers a good mix of financial and operational strength, along with the potential for future sales and profit margins. Yes, it is possible that the stock will pull back if the indices drop back below their all-time highs. But Target has earned its premium on the stock price, so you don’t have to wait for a correction if you’re interested in the stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.