The great thing about American capitalism is that shareholders can have a say in the direction of the companies that they own. If the company is underperforming, shareholders can vote out the Board of Directors and usher in new blood. Unfortunately for activist shareholder William Ackman, it didn't quite work out this way. In a big blow to Ackman and his plans, shareholders voted to keep the four incumbent board of directors by large margins.
“On behalf of Target’s Board of Directors and management team, we thank our shareholders for their overwhelming support throughout this process,” said Gregg Steinhafel,
Target's Chairman, President and Chief Executive Officer. “Today’s outcome demonstrates the confidence Target shareholders have in our Board’s qualifications, diversity and experience to provide effective and independent oversight and direction to the company, contributing to the creation of one of the most recognized brands in the United States. We remain dedicated to serving the interests of all shareholders by sustaining Target’s competitive advantage, driving continued profitable growth and generating substantial shareholder value over time.”
Ackman is the head of
Pershing Square Capital Management which owns almost 8% of Target's stock. Ackman really wanted the company to spin off its real estate holdings into a separate REIT and to lessen its exposure to consumer credit cards. These seemed like reasonable measures, but apparently shareholders didn't have the same sense of urgency as Ackman did.
Shareholders couldn't doubt Ackman's motives as his interests were aligned with theirs: to get the stock to go up. It hasn't been doing much of that since Ackman started building his position in the stock in early 2007. Of course, Ackman bought a ton of call options on Target back when the stock was in the $70 range and one of his funds lost 90% as a result. Overall, the stock is down by about a third since then while hated rival
Wal-Mart is slightly positive. So how does
Target's stock look now?
I believe that there is upside to the shares at these levels.
Target is currently trading at 12.3x next year's estimates, which is actually slightly less than its long-term growth rate. It is only trading at 0.5x sales as well. Analysts have been increasing their earnings estimates for the company. Over the past month, this year's estimates have risen 33 cents to $2.84 per share. 13 out of the 18 analysts covering the stock have boosted their numbers. Additionally, the company does a good job of exceeding expectations as it has posted an average positive surprise of 6% over the past four quarters.
Assuming the company can earn $3.30 next year, I think the stock can hit at least $46. I arrive at that price by applying a price/earnings ratio of 14x to that $3.30 in earnings per share. That is a fairly conservative multiple to put on the stock, so there is some margin of safety to work with. If the economy picks up faster than expected, the stock could certainly pierce the $50 level over the next 12-18 months. Now that it is apparent that radical changes will not happen at the company courtesy of William Ackman, the future is a lot clearer for Target shareholders.
