Financial Analysis: Target (TGT) versus Fred’s (FRED)

Target (NYSE: TGT) and Fred’s (NASDAQ:FRED) are both retail/wholesale companies, but which is the better investment? We will contrast the two businesses based on the strength of their dividends, profitability, institutional ownership, earnings, valuation, risk and analyst recommendations.

Risk & Volatility

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Target has a beta of 0.73, indicating that its stock price is 27% less volatile than the S&P 500. Comparatively, Fred’s has a beta of 1.57, indicating that its stock price is 57% more volatile than the S&P 500.

Insider & Institutional Ownership

87.0% of Target shares are held by institutional investors. 0.2% of Target shares are held by company insiders. Comparatively, 6.9% of Fred’s shares are held by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Profitability

This table compares Target and Fred’s’ net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Target 4.08% 23.04% 6.71%
Fred’s -6.80% -9.94% -4.10%

Dividends

Target pays an annual dividend of $2.48 per share and has a dividend yield of 3.4%. Fred’s pays an annual dividend of $0.12 per share and has a dividend yield of 3.7%. Target pays out 52.7% of its earnings in the form of a dividend. Fred’s pays out -23.1% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Target has raised its dividend for 50 consecutive years. Fred’s is clearly the better dividend stock, given its higher yield and lower payout ratio.

Analyst Ratings

This is a summary of recent ratings for Target and Fred’s, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Target 1 11 8 0 2.35
Fred’s 0 2 0 0 2.00

Target presently has a consensus price target of $73.11, indicating a potential upside of 0.91%. Fred’s has a consensus price target of $6.00, indicating a potential upside of 85.19%. Given Fred’s’ higher probable upside, analysts clearly believe Fred’s is more favorable than Target.

Earnings and Valuation

This table compares Target and Fred’s’ gross revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
Target $71.88 billion 0.55 $2.93 billion $4.71 15.38
Fred’s $2.13 billion 0.06 -$66.53 million ($0.52) -6.23

Target has higher revenue and earnings than Fred’s. Fred’s is trading at a lower price-to-earnings ratio than Target, indicating that it is currently the more affordable of the two stocks.

Summary

Target beats Fred’s on 12 of the 17 factors compared between the two stocks.

About Target

Target Corporation operates as a general merchandise retailer in the United States. The company offers beauty and household essentials, including beauty products, personal and baby care products, cleaning products, paper products, and pet supplies; food and beverage products, such as dry grocery, dairy, frozen food, beverage, candy, snacks, deli, bakery, meat, and produce products; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. It also provides home furnishings and décor comprising furniture, lighting, kitchenware, small appliances, home décor, bed and bath products, home improvement products, and automotive products, as well as seasonal merchandise comprising patio furniture and holiday décor; and music, movies, books, computer software, sporting goods, and toys, as well as electronics that include video game hardware and software. In addition, the company offers in-store amenities, which comprise Target Café, Target Optical, Starbucks, and other food service offerings. It sells its products through its stores; and digital channels, including Target.com. As of March 8, 2018, the company operated 1,826 stores. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota.

About Fred’s

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers household cleaning supplies, health products, beauty and personal care products, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 28, 2017, the company operated 628 retail stores, including 55 express stores and 3 specialty pharmacy-only locations; 362 pharmacies; 3 specialty pharmacy facilities; and 16 franchised stores in 15 states of the southeastern United States. Fred's, Inc. was founded in 1947 and is headquartered in Memphis, Tennessee.

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