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Buy Target because it has a ‘viable’ strategy to compete with Amazon: Analyst

  • MKM Partners is optimistic over Target's online and small-format store initiatives.
  • Target is "looking like a better competitor to Amazon," the firm's analyst said.
  • The retailer's shares are down 22 percent year to date through Wednesday versus the S&P 500's 10.2 percent return.
Brian Cornell, CEO of Target
Ashlee Espinal | CNBC
Brian Cornell, CEO of Target

After a rough year so far, Target shareholders may have some hope, according to one Wall Street firm.

MKM Partners raised its rating on the retailer to buy from neutral, citing the company's successful online and new store format initiatives.

Target is "looking like a better competitor to Amazon," analyst Patrick McKeever wrote in a note to clients Thursday.

"We are cognizant that retail stock valuations are under pressure, but investors are increasingly willing to pay a premium for traditional retailers that are insulated from Amazon or have a viable long term strategy to compete. We put Target in the latter group and think this will become increasingly clear over the next several quarters as investments gain traction," he added.

Target shares are underperforming the market this year. Its stock is down 22 percent year to date through Wednesday versus the S&P 500's 10.2 percent return.

McKeever raised his 12-month price target for Target shares to $69 from $58, representing 22.5 percent upside from Wednesday's close.

"We think management is becoming more proactive/aggressive," he wrote. "New initiatives including Target Restock and a curbside-delivery pilot are also promising in our view."

The analyst said Target's online sales grew 32 percent in its second-quarter from the 22 percent in the previous quarter. He also noted its recent acquisition of Grand Junction, a last-mile delivery technology firm.

In addition, the early performance of Target's new smaller stores have "been very impressive, as small-format productivity is more than 2x the company average, and stores open more than a year are comping up high-single digits," he wrote.