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Tuesday, September 5th, 2017

Target (TGT): Buy

With concerns over Amazon and declining sales, the stock has been under pressure. Sales, however, have declined by only 2.8% over the last 12 months and EPS has declined 3.9% during the same time frame. The valuation measures are a major positive for the company. The current P/E of 10.98 is well below an industry average of 188.82, which is outrageously high. Price/Sales of 0.43 is favorable compared to an industry average of 1.9. Price/Tangible Book Value of 2.67 is below the industry average of 28.5 and Price/Cash Flow of 5.8 also looks good when compared to the industry average of 21.89. Target pays a nice dividend of 4.57% and uses just 48.7% of earnings to pay out that dividend. This gives me comfort in the sustainability of the dividend moving forward. The balance sheet does have some concerns, as I would like to see the company’s current ratio of 0.91 above 1.0 and the total debt/equity of 110.3% a little lower. Looking out to January 2019, an estimated GAAP EPS of $4.39 would give me a target sell price of $72.44.

Best Buy (BBY): Buy

Best Buy recently reported a strong quarter with results in sales, earnings, and comparable sales exceeding estimates. The stock, however, was pressured as the CEO stated mid-single digit comp sales would not be the new norm and that gross margins may fluctuate. This could have created a great buying opportunity as the company has proven it can fight back against Amazon. The current P/E of 14.38 is a positive when compared to the industry average of 16.18 and Price/Tangible Book value of 4.21 also looks favorable against the industry average of 4.79. BBY pays a decent dividend of 2.5% and it only uses 23.6% of earnings to pay out that dividend. With a low payout ratio, investors could see an increase in the dividend overtime. Over the last 12 months sales have grown by 1.2% and EPS has seen an increase of 24.8% during the same time frame. The balance sheet is very strong as the current ratio is 1.42 and debt/equity is just 31.2%. Looking out to January 2019, an estimated GAAP EPS of $4.27 gives me a target sell price of $70.46.

Apple (AAPL): Hold

There is a lot of excitement surrounding the release of the new iPhone. The problem is, most of this excitement is already baked into the current stock price. The stock has been a great performer this year, but it appears that it is getting a little expensive. The current P/E of 18.6 is below the industry average of 19.8, but the other valuation ratios exceed the industry average. Price/Sales of 3.78 is above the industry average of 2.7; Price/Tangible Book Value of 6.79 is above the industry average of 6.33; and Price/Cash Flow of 14.8 exceeds the industry average of 13.28. The balance sheet looks decent as there is a current ratio of 1.39 and debt/equity is a little high at 81.8%. Much of this can be attributed to the company’s accounting practices and the large position of cash that is held outside the United States. Looking out to September 2018, an estimated GAAP EPS of $10.80 gives me a target sell price of $178.20.

Walmart (WMT): Sell

Walmart has done a great job expanding its online presence and fighting back against Amazon. The stock price has performed well through the year, but the valuations now look expensive. The current P/E of 18.9 is above the industry average of 17.65; Price/Sales of 0.49 is above the industry average of 0.41; and Price/Cash Flow of 10.01 also exceeds the industry average of 7.73. The balance sheet looks decent as I would like to see the current ratio of 0.78 above 1.0, but debt/equity looks good at 62.4%. Looking forward to January 2019, an estimated GAAP EPS of $4.63 gives me a target sell price of $76.40.

Microsoft (MSFT): Sell

There has been a lot of excitement surrounding Microsoft’s cloud business and that has helped propel the stock higher in 2017. While the company has been able to grow sales at 5.4% and EPS at 29.4% over the last 12 months, the valuation ratios look expensive. The current P/E of 27.3 is below the industry average of 42.1, but this ratio is still higher than I would like it to be. Price/Sales of 6.3 is above the industry average of 6.2 and Price/Cash Flow of 19.0 also exceeds the industry average of 18.4. The current ratio of 2.48 shows the company has plenty of liquidity, but I would like to see the Debt/Equity of 119.1% a little lower. Looking forward to June 2019, an estimated GAAP EPS of $3.51 gives me a target sell price of $57.92. Microsoft’s price history proves as a great example as to why you don’t overpay for a company’s valuation ratios. During the tech boom, investors that invested at Microsoft’s peak would have waited approximately 16 years to get back to break-even after the company’s stock price faltered during the tech bust.

Amazon (AMZN): Sell

Amazon has been a stock market star, as the stock has surged with its lofty growth expectations. The problem is the company has valuation ratios that are hard to justify. The current P/E of 240.7 is well above the industry average of 54.2; Price/Sales of 3.1 is expensive against the industry average of 1.25; Price/Tangible Book Value of 24.2 exceeds the industry average 16.5; and Price/Cash Flow of 40.2 also is well above the industry average of 16.4. The company’s growth expectations have stemmed from the sales growth which has seen an increase of 24.4% over the last 12 months. During the same time frame, EPS has declined 1.2%. I don’t like to see EPS declining when sales are growing. Looking forward to December 2018, an estimated GAAP EPS of $9.44 gives me a target sell price of $155.76.

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