Well before the trading in the equity market opened on Friday morning, Goldman, Sachs & Co. analyst Matthew Fassler upgraded Target Corp. stock to a “buy.”
Also before the market opened, but well after Fassler acted, Target announced that its giant customer data security breach was far worse than previously thought, its fiscal fourth quarter comparable store sales decline was worse than thought and its earnings in Canada were worse than thought.
And, of course, it’s earnings per share for the fourth quarter were going to be worse than thought.
I’m sure Fassler didn’t have a great start to his Friday workday, once the Target release was out, but Fassler doesn’t look particularly bad even considering Target’s terrible news. And he may prove to be correct in his thesis on the stock.
Fassler based his optimistic view on an expectation that comparable-store sales will turn around in 2014, Target’s operations in Canada will improve dramatically and that Target’s e-commerce progress will continue.
The costs of cleaning up the data breach, whatever they are, will not be much of a factor in forward earnings estimates or valuation. He did expect that the cash outlay would use up some of the capital allocated to buying back stock.
He certainly was planning on the fourth quarter looking weak: his report cut estimates for the last fiscal quarter to below management’s fourth-quarter guidance and the consensus of other analysts who follow Target.
Later in the morning, after Target’s news release was out, Fassler wrote that his estimates and target price for the stock would have to be updated to reflect what Target had just announced.
“That said,” he wrote, “it does not derail the notion that the firm suffered from a virtually unique bad fiscal 2014 – still ongoing – with the potential to recover across the board.”
Fassler is in the minority by turning bullish on Target’s stock, but he deserves credit for making a call. To upgrade the morning after the company reports a big comparable store sales gain is hardly gutsy and adds far less value.
For those surprised that Target’s stock continues to trade above $60 per share, having Goldman on the street with this kind of report is one reason why. And it's one more example of how the investment community has come to mostly regard 2013 as just Target’s very bad year.
A quick scan of investment research this week confirmed what I suspected -- the massive theft of customer data from Target Corp. that’s been called the gravest crisis in the company’s history has been largely shrugged off by the investment community.
Investors appear to be treating Target’s as more or less the kind of thing that can happen to any major retailer, much like an occasional hailstorm for Minnesota corn farmers.
There have been other losses of customer data at retailers such as the The TJX Companies, Inc. and DSW, Inc. While painful in the short run those incidents appeared to have had little long-term impact on the business.
It’s mostly seen as a massive headache for Target’s managers when they already had plenty of other things to work on.
Only one of the major securities firms following Target appears to have brought down its earnings estimate for the fourth quarter, when Faye Landes of Cowen and Co. put out a note on Christmas eve morning that reduced her estimate for the fourth quarter from $1.52 in earnings per share to an estimate of $1.40 per share. She dropped her estimate of comparable store sales a bit as well.
The company has not updated it’s guidance for the quarter to account for the data breach, but Landes wrote that the publicity surrounding the data breach couldn’t have helped store traffic any in the last few shopping days before Christmas, and her reduction in Q4 estimates was a common sense response.
A couple of other analysts wrote recently that the one thing that's a little different in the case of Target is that the company has its customer loyalty program tied to its own branded credit and debit cards, called REDcards. So the hackers victimized some of Target’s best customers.
But this data theft would only be a significant story for investors if fallout from it would be enough to bring down estimates of earnings and sales growth for 2014 and 2015. As it stands right now, the thinking appears to be that the damage will be largely contained in this year’s fourth quarter.
It’s worth noting that even if the data breach is perceived as more hassle than substantive problem, it’s still not that easy to find analysts who are enthusiastically recommending the stock or who saw the dip in share price after the news broke as a wonderful buying opportunity. Landes said it's wiser to steer clear of Target's stock.
Target still has all of the same challenges it had before the theft. Its expansion into Canada is still a work in progress, and the company has yet to show it can end a recent streak of quarters with declining customer traffic in U.S. stores.
It’s been a particularly interesting week for Bitcoin, the popular virtual currency that is stateless and anonymous, and thus nearly perfect for all sorts of “commerce” on the Internet that people don’t want to run through a PayPal account.
First, even by the standards in Bitcoin trading it was a wild ride this past week, with one Bitcoin trading in a range of $340 to $1,240 just this last week. Those prone to airsickness probably shouldn’t hold any Bitcoin.
Then, the Norwegian government became just the latest to declare that a Bitcoin isn’t money.
The European Banking Authority ended the week by issuing what was effectively a blanket warning, citing the wild fluctuations in price, the danger that the so-called digital wallet could get hacked and the complete absence of legal protections for users.
It’s not even clear that if an owner gets all of his Bitcoins stolen that there would be any way to show that a crime had been committed.
Fidelity Investments, the big mutual fund company, also took steps this week to block investments out of clients’ IRAs into a Bitcoin investment trust.
For Bitcoin enthusiasts, these are the pronouncements of people who just don’t understand. The appeal of Bitcoin is that it’s stateless, anonymous, and beyond the reach of mutual fund managers, regulators and central bankers, who back in 2008 didn’t impress anyone with their competence, anyway.
So the Bitcoin craze continues, with even a firm in Sweden opening this past week what it called the world’s first Bitcoin automated teller machine.
Many enthusiasts gathered earlier in the week in Las Vegas for a conference called “Inside Bitcoins: The Future of Virtual Currency.” One reporter who attended said it had to feel of an old-time religion revival meeting.
There were whoops and shout-outs when one of the speakers said that Bitcoin was going to be the single biggest category for 2014 venture capital investment.
The venture firm Andreessen Horowitz punctuated that point this past week with news that it had led a $25 million Series B investment in San Francisco-based Coinbase, which is thought to be the largest-ever venture investment in a Bitcoin-related company.
My view continues to be that new forms of payment systems will evolve and become broadly accepted, but that Bitcoin is today mostly a pseudo-asset that has somehow captured the fancy of speculators. And like most speculative fads, this speculation will abruptly end one day with plenty of speculators painfully impaled on their Bitcoin wallets.
Perhaps what was most striking about coverage of the conference in Vegas was the simple observation of a USA Today reporter that the audience consisted almost exclusively of men.
Women, it seems, are once again proving that they are shrewder financial managers than the guys.
In a recent column I described the work of David Strasser of Janney Montgomery Scott, a senior analyst who was rewarded for hanging tough with a buy rating on the stock of Best Buy Co. even as doubts started appearing last year about the company’s very existence.
So far this year the stock has moved from less than $12 per share to a peak of more than $44 earlier this month and closed the week at $39.37.
There is today the same sort of independent thinking on Best Buy, but instead of holding fast to a positive rating, this view is all about sticking to a pessimistic outlook. That bearish analyst is Michael Pachter of Wedbush Securities, Inc.
Pachter doesn’t appear to be quite as high-profile as Strasser but he is far from a fringe figure, an experienced analyst working with a well-known firm based in Los Angeles. His recent update is polished and grounded on some of his own team’s legwork.
“Best Buy management has done a laudable job in streamlining the company’s cost structure,” he wrote after the company released results from its third quarter on the 19th. "With that said, net income and cash flow are expected to be lower this year compared to last, with [comparable store sales] declines and margin compression more than offsetting the benefits from the lower overall cost structure. We… believe that Best Buy’s profits and cash flow will continue to decline at a faster rate than it can cut costs.”
It’s important to note that he does not knock Best Buy’s management, but he doesn’t bother to sugarcoat his views, either. The company’s holiday season initiatives, he wrote, will “result in a costly failure by year-end.”
With the stock trading near $40 per share, Pachter has a 12-month price target of $9. His formal investment rating is underperform, which means the analyst expects this stock to do worse than the broader market.
But with a 12-month target price of $9 per share on a stock trading near $40, it’s a rating that would be read by any portfolio manager as “sell it, and sell it now.”
Somebody is going to be very wrong on this stock – which is why we have a market.
It’s hard to know whether the initial public offerings of Twitter or Facebook had been the more poorly managed deal.
It’s a tough call. One was set up to maximize proceeds to the company and the other apparently planned for there to be a big pop in value on the opening trade. Neither was the perfect IPO.
The perfect IPO is one that comes at a fair price. What’s fair? A good indication is when the price of the stock the morning after the offering opens up maybe 15 percent from the IPO price and then sticks at that valuation, not one that shoots up 73 percent as Twitter’s did on Thursday. By that measure Facebook’s was even closer to the mark.
That’s not the way it’s been playing, as Friday Twitter seems happy and in the days following Facebook’s 2012 IPO its leaders were anything but, having apparently bungled its deal.
Remember how Facebook co-founder Mark Zuckerberg wore a hoodie to an early roadshow meeting, an act investors correctly understood as a mark of immaturity? With strong projected demand for shares, the company increased the offering by 25 percent. Then the expected price kept inching up. The deal finally came at $38.00 per share.
It wasn’t that long after the offering before it had fallen by more than half.
So Twitter’s was going to be the anti-Facebook deal, planning to trade on the New York stock exchange rather than Nasdaq and seeking to not overprice its shares.
The result was a 73 percent pop on day one, from $26.00 per share in the offering to open at $45.10 per share when trading began.
It’s not fair to say that the investment bankers mishandled that deal, as it’s the company with the final say on price. The bankers work for management.
But the bankers could be held accountable for knowing what the fair price was, and there is a traditional way of discovering the fair price. It’s the book.
Goldman Sachs & Co. was called the “book runner” on that Twitter deal because it was keeping track of the indications of interest that came from potential buyers of the stock. It’s bankers should have had a great sense, when went into the pricing meeting, about what the fair value should be.
Instead, a lot of money that could have gone in to the company’s checkbook (and rewarding its earliest investors) instead went to the privileged few who got shares allocated to them in the IPO. It’s unclear why the Twitter executive team can be so pleased about that.
The financial crisis of five years ago taught us to be mindful of asset bubbles, and one of the places to check occasionally is the price of farmland.
That’s a thought shared by the banking analyst Ben Crabtree, now writing for Oak Ridge Financial. His focus is community banks, and overleveraged farm land was a disaster for many community bankers – and farmers – back in the 1980s.
What recently got his attention, he wrote in his most recent update, was when he heard from a rural banker that farmers were “beginning to use the seductive but economically indefensible thought process of ‘average cost analysis.’”
The example Crabtree used is a farmer with 640 acres that cost only $1,000 per acre. So the farmer decides he can easily afford to pay $3,000 an acre for an additional 160 acres because his average cost will still be only $1,400 an acre.
The Crabtree put it, “the math is correct, but the economics are irrational.”
Whether land prices have gotten to irrational price levels or not, they have certainly surged. Minnesota farm land values have moved up from just under $3,000 per acre, on average, in 2009 to just under $5,000 per acre now, according to data Crabtree got from the U.S. Department of Agriculture.
Farm incomes have been strong, of course, and Crabtree in checking found that farmers’ total debt-to-total-asset ratios, after peaking in the 1980s, have generally been trending down. And as for the quality of the region’s community bank agriculture-related loans, Crabtree noted, the credit quality is better now than it’s been any time in at least 30 years.
“But community banking is not done on national scope, but on a county-wide or even local basis, so what is broadly true may not be true on a more granular, farm-by-farm basis – especially when one takes into account weather patterns and their effect on crop yields,” he wrote. “Furthermore, the issue of crop prices needs to be taken into account. A reasonable farmland value when corn was $7.00 a bushel could easily be excessive if corn prices drop back to $4.50 a bushel, as some observers expect.”
Crabtree concluded that the evidence so far is that the region’s community bankers serving farm country don’t appear to be lending on irrational economics, but “the situation bears close watching.”