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Why Target (TGT) Stock is a Buy Ahead of Q4 Earnings

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Target (TGT - Free Report) and many other huge retailers have been some of the big winners during the pandemic, as they ramp up e-commerce sales and grab more market share. The company is coming off three stellar quarters, and its shares are trading around 7% below their mid-January records ahead of its fourth quarter fiscal 2020 financial release on March 2.

Big Retail Keeps Growing

Target’s e-commerce push has helped it thrive during the pandemic, as consumers look for as many different and convenient ways to shop as possible. TGT’s same-day offerings feature in-store pickup, Drive Up, and its subscription-style Shipt unit.

The Minneapolis-based retailer has also continued to attract customers through on-trend and affordable fashion, home décor, furniture, food, and more. TGT also continues to partner with designers on fashion and furniture. And it recently started to work with brands like Levi Strauss (LEVI - Free Report) , as companies revaluate the future of department stores like Macy’s (M).

TGT’s flagship grocery brand, Good & Gather, has also performed well since its launch in September 2019. Target is positioned for long-term growth and it’s separated itself from rivals such as Walmart (WMT - Free Report) and Costco (COST - Free Report) , within some key demographics.

Target’s sales boomed in 2020, with its revenue up 23% in Q3, 25% in Q2, and 11% in Q1. The company then announced on Feb. 13 that its comparable sales jumped 17% for the November/December period.

TGT’s in-store comps popped over 4% during the holiday shopping season, while its digital comps soared 102%. “The momentum in our business continued in the holiday season with notable market share gains across our entire product portfolio,” CEO Brian Cornell said in prepared remarks.

Other Fundamentals

Zacks estimates call for Target’s Q4 sales to jump 18% to reach $27.51 billion and help lift its adjusted earnings by 50% to $2.52 a share. The retailer’s first quarter FY21 revenue is then projected to pop another 5%, with its EPS figure expected to soar 200%.

Target has crushed our bottom-line estimates by an average of 70% in the last three quarters. Plus, its overall earnings outlook has improved recently, which helps it land a Zacks Rank #2 (Buy). TGT also rocks an “A” grade for Growth and a “B” for Value in our Style Scores system.

The nearby chart showcases TGT’s strong run that seen it outclimb Walmart and Amazon (AMZN - Free Report) over the last three years. More recently, Target stock is up 67% in the past 12 months. It has cooled off, up just 3% in the past three months, and at $187 a share it sits about 7% off its mid-January highs.

Target also trades at a discount compared to its industry and WMT. And it rests below levels that are considered neutral in terms of RSI, at 47. For instance, any number above 70 on the Relative Strength Index is often though of as overbought and anything below 30 is oversold.

Bottom Line

Investors should note that Target’s margins are better than its rivals Walmart and Amazon. The company has been able to keep costs relatively low despite its e-commerce push because it is able to fulfill nearly all of its sales via its own stores. Along with its growth and other strong fundamentals, Target provides income, with its 1.5% dividend yield coming in higher than the recently-climbing 10-year U.S. Treasury.

There could be some near-term selling pressure amid some increased market volatility. Still, investors with a long-term view might want to consider Target as a solid retail play for years to come. And 13 of the 18 brokerage recommendations Zacks has for TGT are “Strong Buys,” with none below a “Hold.”

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