Investor's interest drives up Target stock
Industry sources have told Bloomberg News that New York investor William Ackman has bought more than five percent of Target's stock.
Target shares rose about seven percent Thursday amid speculation that Ackman was buying Target shares.
Target won't comment on Ackman's reported purchase. And so far, there have been no official filings about a purchase.
Ackerman would probably want Target to sell its credit card business, says Dave Heupel, an analyst with Thrivent Financial for Lutherans.
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"Given that we have had examples from previous retailers, such as Kohl's and JC Penny selling those products at fairly nice prices and reinvesting the money elsewhere, that is probably what he will push for," Heupel says.
Heupel says there could be a short-term benefit to selling off the credit card business.
"You can get a lot of cash and you can do a lot of things with that," he says. "Buy back your stock. Pay a one-time dividend."
But Heupel says Target management may not be as eager to divest itself of the credit card unit. Target customers have some 18 million credit card accounts with the retailer. And in its most recent quarter, Target made about $140 million from its credit card business. The cards accounted for about a fifth of Target's profits.
"The credit card has always been viewed as an integral part of the company," says Heupel. "It's very profitable."
Ackman is accustomed to making a relatively fast profit on his investments.
"Most of these quote-unquote activist investors are looking to make a quick buck," Jon Fisher, a Minneapolis-based portfolio manager for Fifth Third Asset Management, told Bloomberg.
Ackman has pressured companies such as McDonald's and Wendy's to reduce spending and sell divisions.
Ackman, general partner of Pershing Square Capital Management, and billionaire Nelson Peltz last year persuaded Wendy's to spin off its Tim Hortons unit and sell its Baja Fresh division.
McDonald's plans to use $700 million in proceeds from the sale of 1,600 Latin American stores to pay dividends and buy back stock, moves also urged by Ackman.
Ackman's hedge fund also is the biggest shareholder in Bloomington-based Ceridian.
Ackman told Ceridian's board this week that he can come up with a better deal for shareholders than a proposed $5.3 billion takeover bid management hammered out.
Thomas H. Lee Partners LP and Fidelity National Financial have offered $36 per share for the human-resource and payroll company.
How much pressure could Ackman bring to bear on Target?
That'll depend on how big a stake Ackman takes in Target and how much an argument to sell the credit card business resonates with other shareholders. But for now, most Target shareholders have to be pretty happy. The stock is up about 45 percent over the past year.
"The stores have done well," says Heupel. "Profitability looks good. The outlook looks excellent. There are not a lot of frustrated shareholders who own Target."