Take aim at slimmer Target

Taking Stock

Your Money

May 09, 2004|By ANDREW LECKEY

I READ that Target Corp. is going to sell Marshall Field's and Mervyn's. What is your opinion of its stock?

- R.F., via the Internet

This popular retailer is streamlining to better battle the mighty discount giant Wal-Mart Stores Inc.

Since its Target discount merchandise division of about 1,225 stores provides 85 percent of total revenue, the company decided to put its less profitable Field's and Mervyn's divisions up for sale.

Both chains have been a drag on overall company earnings for years, and numerous Wall Street analysts say they should have been sold long ago. It also stands to reason that new owners should be able to devote more time and attention to the 62-store Field's and 267-store Mervyn's than Target has.

Their sale would make it easier for Target to build on its image as a trendier version of Wal-Mart and draw closer to its rival's profitability. Also, Target would make significant money from the sale.

Target's aggressive push into name-brand deals with the likes of Mossimo, Eddie Bauer and Cynthia Rowley, as well as its expansion into groceries, household items and Target Visa credit cards, should position it well.

The economy is looking up, with spring apparel sales especially strong. Improved retail sales data have included better-than-expected gains for Target.

The biggest question about Target (TGT) shares is whether they've risen too much in price to merit purchase. They're up 14 percent this year, after last year's 29 percent gain.

Although discounters must deal with a backlash in many communities against big-box stores, they seem to be accomplishing this by designing more appealing and environment-friendly sites.

The consensus forecast on shares of Target from Wall Street analysts is a "buy," according to the Boston-based First Call research firm. That consists of eight "strong buys," 11 "buys" and six "holds."

Target's earnings are expected to increase 15 percent this year, compared with the 14 percent forecast for the broad-line retailing industry. Next year's projected 13 percent rise compares with the 15 percent expected for its peers.

The five-year annualized forecast of 15 percent for the company is better than the 13 percent expected industrywide.

Risks include the possibility of its expansion into food, decreasing profit margins and the potential for the credit-card business to have large write-offs. Whenever a retailer ventures into areas that are not in its experience, there is always the potential for things to go wrong. However, Target Chairman and Chief Executive Officer Robert Ulrich has a track record of prudent business practices.

I have a large portion of my Roth individual retirement account invested in Longleaf Partners Fund, and I'm thinking of buying more shares. What's your opinion of this fund?

- M.S., via the Internet

With a $10,000 minimum initial investment required, this fund expects commitment.

An investor must be comfortable with a low-turnover portfolio that is divided among fewer than 30 large- and mid-cap stocks. It also often holds significant amounts of cash.

The $8 billion Longleaf Partners (LLPFX) gained 31 percent over the past 12 months to rank in the lowest one-fifth of mid-cap value funds. Its three-year annualized return of 11 percent put it in the upper one-fourth of its peers.

"Since Longleaf Partners has closed the fund to new investors before when its cash holdings - currently at almost 25 percent - have crept up, I wouldn't be surprised to see it closed again," said Christopher Traulsen, analyst with Morningstar Inc. in Chicago. "So an investor considering it might want to act soon."

The management team of Mason Hawkins, Staley Cates and John Buford invests in companies trading at discounts of 40 percent or more to their determination of the intrinsic value. The fund often takes large positions in individual stocks, which can have its risks. It rarely invests in technology stocks.

The fund's adviser, Southeastern Asset Management, requires that its employees, including fund managers, keep all their invested assets in Longleaf funds. It focuses squarely on the shareholder with detailed, quarterly shareholder reports and clearly stated governing principles.

"You get very experienced managers with this fund who have been with the firm for a long time," Traulsen said. "Furthermore, if you've been spooked by the mutual fund scandal, this shop sets the gold standard for conduct."

Nearly one-fourth of Longleaf Partners' shares are in media, with consumer goods, consumer services and business services its other major concentrations. Its biggest stock holdings were recently Level 3 Communications, Walt Disney, FedEx, Hughes Electronics, Marriott International, Nipponkoa Insurance, Comcast, Hilton Hotels, Yum Brands and Aon. This no-load fund features a low 0.91 percent annual expense ratio.

What are the highest-yielding tax-free money market funds? How are municipal money market funds different from other tax-free money market funds?

- R.L., via the Internet

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