Target Corp (TGT)

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Several retailers raised at Morgan Stanley on improving fundamentals
By: Investing | January 16, 2024

Morgan Stanley analysts upgraded Target (TGT), Dollar General (NYSE:DG), Walmart (NYSE:WMT), and Valvoline (NYSE:VVV), citing “achievable ‘24 estimates combined with stronger ’25 EPS growth.”

Simultaneously, Morgan Stanley also downgraded Tractor Supply (NASDAQ:TSCO) and Driven Brands Holdings (DRVN).

The analysts noted a slightly more favorable fundamental view, driven by three key inflections, including “lower rates, bottoming in durables and a late ’24/early ’25 housing inflection.”

“We are modeling sales-weighted SSS growth of +2.3%/+3.3% in '24/'25 (vs. +1.9% in ‘23),” the analysts wrote in a note.

The team said that the stocks are already reflecting the improvements, primarily due to multiple expansion in November/December. Valuations are now in line with historical P/E ratios and approximately 5% above on EV/EBITDA.

Meanwhile, the consumer sector remains under pressure, especially the "goods" consumer, and durable goods reversion is continuing. The analysts expect flattish durables growth in '24, leading to an improving but still a below-average year, “while ’25 doesn’t look robust either — tempering our enthusiasm.”

Key points in Morgan Stanley’s outlook include “1) Reversion revisit with updated category growth forecasts. 2) Sales analyses to determine achievability of '24 top-line estimates. 3) Seven margin deep dives: freight, inventory/promotions, deflation, e-commerce, shrink, product mix, incentive comp.”

The strategists raised their price target on TGT to $165 from $140, implying an upside of more than 17% from the current price.

“With our broader stock preferences shifting to be more risk-on/cyclical, TGT screens as an attractive investment given its latent earnings potential both on a recovery from idiosyncratic challenges and from a rebound in discretionary spend,” the analysts concluded.

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