The Minneapolis-based department-store chain had its rating raised to equal weight from underweight by the investment bank on Monday, with a $67 price target. The shares were up 1.4% in afternoon trading.
"We see less near-term downside after the stock's recent ~15% decline," equity analyst Simeon Gutman said in the note. "We still have concerns around TGT's medium-term margins, but they seem to be reflected in the stock's below-average valuation and risk/reward now looks balanced."
Morgan Stanley sees "flattish" earnings before interest and tax margins this year, below Target's guidance for expansion of about 10 basis points but improving from a 35-point decline in 2018. Still, the risk of missing the guidance is reflected in the stock's "relatively inexpensive valuation," Gutman said.
"We see limited multiple downside at these levels given our view that TGT is establishing itself as a Retail 'survivor'," along with Amazon.com (AMZN), Walmart (WMT) and Costco (COST), he said.
Target's drivers of its top-line growth have included strong merchandising, greater penetration of its private brand and the bankruptcy of Toys 'R' Us, which gave Target a way to gain share in the toy and baby categories.
"TGT is capable of delivering a higher rate of comp growth than retailers trading at similar multiples (low to mid single digits vs. low single digits on average)," Gutman said. "TGT has established itself as a mass merchant that we believe will stay relevant in the eyes of consumers over time, behind only AMZN, WMT and COST."
Still, there's lingering concerns over Target's supply-chain strategy, which is store-based and could limit margins improving or bring investment needs back into focus, Morgan Stanley's analyst said.
"At some point store-based fulfillment may no longer be able to support the size of the e-commerce business," Gutman said, adding that the retailer itself believes that's many years away.
Price: $ 72.00, Change: $ +1.11, Percent Change: +1.57%
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