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A Side-by-side Analysis of Target Corporation (TGT) and Commercial Metals Company (CMC)

Target Corporation (NYSE:TGT) shares are up more than 15.30% this year and recently increased 2.94% or $2.15 to settle at $75.23. Commercial Metals Company (NYSE:CMC), on the other hand, is up 11.02% year to date as of 05/16/2018. It currently trades at $23.67 and has returned 6.67% during the past week.

Target Corporation (NYSE:TGT) and Commercial Metals Company (NYSE:CMC) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect TGT to grow earnings at a 6.23% annual rate over the next 5 years. Comparatively, CMC is expected to grow at a 45.16% annual rate. All else equal, CMC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 4.74% for Commercial Metals Company (CMC). TGT’s ROI is 13.20% while CMC has a ROI of 3.60%. The interpretation is that TGT’s business generates a higher return on investment than CMC’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. TGT’s free cash flow (“FCF”) per share for the trailing twelve months was +2.95. Comparatively, CMC’s free cash flow per share was +0.23. On a percent-of-sales basis, TGT’s free cash flow was 2.2% while CMC converted 0.59% of its revenues into cash flow. This means that, for a given level of sales, TGT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. TGT has a current ratio of 1.00 compared to 3.10 for CMC. This means that CMC can more easily cover its most immediate liabilities over the next twelve months. TGT’s debt-to-equity ratio is 0.99 versus a D/E of 0.56 for CMC. TGT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TGT trades at a forward P/E of 13.78, a P/B of 3.48, and a P/S of 0.56, compared to a forward P/E of 10.24, a P/B of 1.91, and a P/S of 0.62 for CMC. TGT is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. TGT is currently priced at a -1.17% to its one-year price target of 76.12. Comparatively, CMC is -8.26% relative to its price target of 25.80. This suggests that CMC is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TGT has a beta of 0.69 and CMC’s beta is 1.35. TGT’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. TGT has a short ratio of 7.32 compared to a short interest of 2.49 for CMC. This implies that the market is currently less bearish on the outlook for CMC.

Summary

Commercial Metals Company (NYSE:CMC) beats Target Corporation (NYSE:TGT) on a total of 8 of the 14 factors compared between the two stocks. CMC is more profitable, higher liquidity and has lower financial risk. In terms of valuation, CMC is the cheaper of the two stocks on an earnings and book value, CMC is more undervalued relative to its price target. Finally, CMC has better sentiment signals based on short interest.

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