Target (TGT) Blows Away Third Quarter Estimates

Target Corporation (TGT) stock is trading higher by more than 2% in Wednesday's pre-market after the retail giant blew away third quarter top- and bottom-line estimates, booking a profit of $2.79 per share on a 23.3% revenue increase to $22.34 billion. Total comparable sales grew an impressive 20.7% overall, with 9.9% growth in physical stores and 155% growth in online sales. The company chose not to offer fourth quarter guidance due to uncertainty as a result of the COVID-19 pandemic.

Key Takeaways

  • Target beat third quarter top- and bottom-line estimates by wide margins.
  • The company gained market share in most major categories.
  • The stock is testing October's all-time high, with a breakout opening the door to the $170s.

Curbside pickup service underpinned better-than-expected revenue, growing by more than 500%. The Shipt home delivery service shined as well, rising nearly 300% compared to the second quarter. Market share expanded in most major categories, while average transaction size grew a healthy 15.6%. And to top off the upbeat release, the company lifted a share repurchase suspension put in place in March.

The buy-the-news reaction bucked the recent trend of Walmart Inc. (WMT), The Home Depot, Inc. (HD), and other COVID-19 retail beneficiaries selling off despite exceptionally strong quarterly results. In turn, this highlights a growth story that is likely to persist long after the pandemic runs its course. Target shares tagged an all-time high in the pre-market, a few ticks above the Oct. 20 peak, but it's too early to declare a breakout.

Wall Street hasn't commented on earnings, but upgrades and higher price targets are likely. Target stock is currently rated as a "Moderate Buy," based upon 14 "Buy" and 4 "Hold" recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets range from a low of $127 to a Street-high $180, while the stock is set to open Wednesday's session about $4 below the median $170 target.

A story stock refers to a company's shares whose value reflects expected outperformance, the culmination of some new innovation, or favorable press coverage, rather than its market value being solely based on fundamentals like assets and income.

Target Monthly Chart (2007 – 2020)

Monthly chart showing the share price performance of Target Corporation (TGT)

Target stock completed a round trip into the 2007 high at $70.75 in 2013 but didn't break out until the first quarter of 2015. The initial advance added just 15 points before easing into a corrective pattern that crisscrossed the prior high repeatedly until 2019, when it broke out above an inverse head and shoulders neckline in the mid-$80s. The August breakout gap signaled a major change in character, generating strong gains into January 2020.

The stock fell about 40 points during the pandemic decline, testing breakout support, ahead of recovery wave that completed a small-scale cup and handle breakout in August. It posted strong returns into October's all-time high at $167.42 and turned tail, pulling back into November. Price gained ground ahead of earnings, stalling less than two points below the prior peak, and will be testing October resistance on Wednesday.

The monthly stochastic oscillator has reached an extremely overbought level that generated bearish crossovers in 2012 and 2018, so market watchers should pay close attention to the short-term tape because a reversal at resistance could expand into more forceful selling pressure. On the flip side, a high-volume breakout and buying spike to $170 should do the trick, allowing the stock to build on gains into December.

An inverse head and shoulders pattern is similar to the standard head and shoulders pattern, but inverted, with the head and shoulders top used to predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics: the price falls to a trough and then rises; the price falls below the former trough and then rises again; and finally, the price falls again but not as far as the second trough.

The Bottom Line

Target stock is testing October's all-time high after handily the company beat third quarter 2020 profit and revenue expectations.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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