Does Target Have REIT Potential?

• Target Corporation TGT gained 2.8 percent thus far in 2015, outperforming the S&P 500 by 6 percent.
• Morgan Stanley's Simeon Gutman said the retailer could see 30 percent upside by spinning off a REIT, putting combined shares at more than $100.
• Gutman, however, attributed low likelihood to the possibility, though he noted that investors may get anxious for value "if expected top/bottom line growth doesn't materialize."

Morgan Stanley's Simeon Gutman reiterated his Underweight rating and $74 price objective on Target after analyzing whether the company would spin off a REIT. Gutman said that management could unlock 30 percent in value, but attributed a low likelihood to the possibility.

For Gutman, the most "realistic" option for a REIT saw the company spin off its assets into a "triple net REIT," before leasing those buildings back to Target. The REIT can take on the leverage, while repatriating the cash back to Target. If done this way, Gutman said shares could increase to between $87 and $112 by putting conservative multiples on each portion of the business.

This isn't the first time that a REIT structure has come up for Target. In 2008, Bill Ackman and Pershing Square Capital proposed the structure. At that time, Target management pushed back and ultimately declined to pursue the opportunity.

Barring this, Gutman said that the firm expects Target to trade at 15x multiple to its 2016 expected EPS of $5.10 – at $76. Further, he noted that "top-line acceleration and margin gains appear to be priced in to the stock."