Option Trade 
Target Corporation (NYSE:TGT) Calls Monday, February 27, 2017

** OPTION TRADE: Buy the TGT MAY 19 2017 70.000 call at approximately $1.50. Place a pre-determined sell at $3.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.60.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Target Corporation (NYSE:TGT), the operator of general merchandise stores, is slated to report fourth-quarter fiscal 2016 results before the market open on February 28, with the consensus calling for earnings of $1.50 per share, on revenue of $20.75 billion. During the same period last year the company had earnings of $1.52 on revenue of $21.6 billion.

Target Corporation has a history of performing better than expected when it comes to EPS, while mostly reporting in-line revenue. It often outperforms both Wall Street consensus and its own guidance, which implies that Target's management usually tends to give a very conservative guidance while analysts perhaps willingly leave room for Target to report an earnings beat.

Sentiment on the stock has been overwhelmingly bearish in recent months, and the stock has fallen 10.4% on the year. Wal-Mart (WMT) has already reported its quarterly results, and the stock traded higher on better than expected earnings and upbeat news on its online sales growth. Wal-Mart’s earnings indicates that Target is likely to top estimates as well, but the company has not been investing as heavily in its e-commerce business as Wal-Mart has, so online sales growth will not be as strong.

However, the Street has a whisper number of $1.54, four cents higher than the consensus, so Wall Street is expecting an earnings beat.

The stock’s valuation is low, with a P/E of 11.8, and analysts forecast earnings growth of 7.7% this year, and an additional 5.7% next year. Given the low valuation, the stock could enjoy a big rally as long as earnings are strong, and Wall Street does not see any sign of weakness in the company’s underlying business.

Target Corporation has a 12 month low of $62.94 and a 12 month high of $84.14. The firm has a market capitalization of $36.50 billion, a P/E ratio of 11.56 and a beta of 0.63. The firm’s 50-day moving average is $66.36 and its 200 day moving average is $70.37.

Influencing Factors to Consider               

The fourth quarter guidance that Target has provided at the release of its third quarter results showed a guidance for a YoY revenue decline of 3% for the fourth quarter with comparable sales expected to grow between -1% and 1%. The YoY overall sales decline would be partly due to the removal of pharmacy and clinic sales from this year's results. Adjusted EPS was expected to be reported between $1.55 and $1.75. But in January it became clear that Target was one of the multiple companies that had suffered from disappointing sales during the holiday season. Because of this, management had to lower their fourth quarter guidance.

Nevertheless, Target has undertaken a series of initiatives, such as the development of omni-channel capacities, diversification and localization of assortments, along with emphasis on smaller format stores, all of which is likely to help augment performance in the quarter to be reported.

Also, the company plans to expand merchandise assortments, with special focus on the well-performing categories like Style, Baby, Kids and Wellness.

Further, management is keen on expanding the Food category.

Moreover, Target has adopted an aggressive cost reduction strategy as well.

Wall Street analysts have lowered their EPS consensus from $1.65 to $1.52 thanks to the lowered guidance provided by Target, landing it at the higher end of company guidance.

Analysts Opinions

Zacks Investment Research upgraded Target Corporation from a “sell” rating to a “hold” rating in a report last Monday.

A number of other brokerages also recently weighed in on the stock…..

  • Susquehanna Bancshares Inc began coverage on Target Corporation in a report on Friday, February 10th. They set a “neutral” rating and a $70.00 price target for the company.
  •  Vetr cut Target Corporation from a “strong-buy” rating to a “buy” rating and set a $72.80 price target for the company in a report on Thursday, February 9th.
  •  Sanford C. Bernstein began coverage on Target Corporation in a report on Monday, February 6th. They set an “outperform” rating and a $77.00 price target for the company.
  • Finally, Credit Suisse Group cut Target Corporation from a “neutral” rating to a “sell” rating and reduced their price target for the stock from $77.00 to $67.00 in a report on Friday, January 20th.

Four analysts have rated the stock with a sell rating, seventeen have issued a hold rating and eleven have issued a buy rating to the company’s stock. The stock currently has an average rating of “Hold” and a consensus price target of $73.92.

Harvey’s Options Volatility Indicator


Wall Street is being too conservative after Target updated its fourth quarter guidance. It could be expected that Target will meet their own updated EPS guidance with ease, with the possibility of even reporting a higher EPS than their updated guidance suggested which is not that surprising when considering management's history of giving a conservative guidance for EPS.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the TGT MAY 19 2017 70.000 call at approximately $1.50. Place a pre-determined sell at $3.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.60.

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