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Why Target Stock Inched Higher Today


What happened

Modestly good news on a contract extension helped to lift shares of retail giant Target (TGT 1.94%) 2.1% through 12:30 p.m. ET on Wednesday.

As Target announced, it has secured an extension of its deal to have Canada’s Toronto Dominion Bank (TD -0.78%) issue its RedCard credit card and other private label cards for a multiyear period.  

So what

Target didn’t provide a lot of detail on the contract extension in its update, beyond noting that it has partnered with TD on this card for nearly a decade now. The company did not say, for example, whether the terms of its deal with TD have been altered at all, such as through raised (or lowered) fees paid to TD for its services. It also did not specify a duration for the contract extension.

For consumers, at least, the deal remains the same: RedCard holders get 5% off their Target purchases, 2% off gas and dining purchases, and free shipping from Target.com, in addition to ancillary benefits. For Target, extending the relationship also works out to more “engaged” customers, who presumably do more of their total shopping, and thus spend more money, at Target.

Now what

Long story short, nothing has really changed with Target by virtue of this announcement, unless you consider the fact that Target doesn’t have to worry about finding a new credit card partner for a few years. In the absence of any information to the contrary, Target still looks like a high-quality retailer earning about a 4% profit margin on $108 billion or so in annual revenue. It’s still slightly cheaper than the average S&P 500 stock at a P/E ratio of less than 19. And it still pays a very respectable 2.7% dividend yield.

While today’s news may not be especially great for Target, therefore, at least it’s not bad news. And with most analysts still predicting near-17% long-term earnings growth for the company, it leaves me thinking that Target stock is still at worst fairly priced — and maybe even a bargain.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.





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