The bank said Target should be revalued from the "middle bucket" of retail to the best-in-class "Amazon safe" bucket. J.P. Morgan upgraded its rating on the stock from neutral to overweight and hiked its target price from $81 to $100.
"In our view, TGT does not need to outrun AMZN for a revaluation, rather it needs to outcomp other home and apparel retailers, namely the mall based retailers, department stores, and specialty home retailers, for the valuation rerating to materialize," J.P. Morgan's Christopher Horvers said in a note to clients Thursday. "Its continued share gain...should help them outcomp its traditional retail peers and transition to the first bucket of retail."
J.P. Morgan breaks retailers into three categories. First, the expensive, best-in-class gainers with low Amazon-risk. Second, low Amazon-risk companies with questionable growth and margin outlook, and third, the structurally impaired bucket. Horvers is making the case for Target to move from bucket two to bucket one.
Target beat on the top and bottom lines for its fiscal first-quarter earnings on Wednesday. The stock soared nearly 10% as its same-store sales increased 4.8%, topping the forecast 4.2%.
The big-box retailer posted adjusted earnings per share of $1.53 on revenue of $17.63 billion. Wall Street expected earnings per share of $1.43 on revenue of $17.52 billion, according to Refinitiv.
Target's e-commerce sales grew 42%, largely driven by its curbside pickup for online sales, something Amazon does not offer.
"Given its expansive fulfillment options (free two-day shipping, Restock, curb side Pick-Up and same-day through Shipt), we are less concerned about the AMZN boogeyman coming back to haunt TGT as retail sales moderate," said Horvers.
J.P. Morgan likened Target's revaluation to Walmart in 2017.
"While this is ahead of its 14x historical FY1 average, we expect the market to reconsider its view on TGT," said Horvers. "Ultimately, the change in the market's view of WMT drove a substantial revaluation in 2017 and we expect a similar move for TGT in 2019."
Shares of Target are up nearly 9% over the past 12 months, and up more than 17% year-to-date. Amazon shares are up 16% in the past year and up 23% since the start of the year.
The stock was slightly lower in premarket trading Thursday.