Target is downgraded at KeyBanc due to massive student loan repayment headwind
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KeyBanc Capital Markets lowered its rating on Target (NYSE:TGT) to Sector Weight from Overweight on Monday chiefly due to concerns over consumer headwinds over the next 18 months.
Analyst Bradley Thomas said a major consideration with Target (TGT) is the debt ceiling package passed by Congress, which included a condition that student loan payments resume after August 30. Thomas said KeyBanc's analysis suggested a sizable headwind from the policy change.
"With ~27M borrowers expected to begin repayment and an average monthly payment of $400-$460, we estimate the resumption of federal student loan repayments will create a ~$46.1B headwind from September-December, with an annualized impact of $128.8B- $148.1B... The policy change further elevates the risk for consumer discretionary spending, particularly for the 2023 back-to-school and Holiday Season."
Thomas noted firms such as Dollar General (DG), Big Lots (BIG) and Dollar Tree (DLTR) all lowered guidance with their Q1 earnings reports, while Target (TGT) held its guidance steady.
In terms of valuation, Target (TGT) was noted to trade at 17.1X and 15.5X KeyBanc's 2023 and 2024 EPS estimates of $7.80 and $8.60, respectively. That level compares with a five-year average forward P/E of 17X, with a range of 11X to 24X.
Shares of Target (TGT) fell 0.85% in premarket trading on Monday.
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