Walmart versus Target: comparative investment analysis

WMT vs. TGT

There are a number of variables that one can examine to help make an investment decision between Wal-Mart and Target. Some of these variables will be analyzed in this report, and then a recommendation will be made as to which company is the better equity investment.

The current market price for Wal-Mart is $52.65 per share. This price fits in the middle of the company's 52-week high ($57.90) and low ($47.77). For Target, the current price is $50.06, which is at the low end of its 52-week range ($48.23 - $60.97). These stock price levels give Wal-Mart and Target price/earnings ratios of 12.60 and 12.52 respectively (MSN Moneycentral, 2011). What the price and P/E levels indicate is that there is little to choose between the two firms. Therefore, an investigation of some of the other variables will need to be undertaken in order to differentiate between the investment quality of the two companies.

The first is the return on investment. Wal-Mart's ROI is currently 13.8%, and the company as a five-year average ROI of 13.5%. Both of these levels are superior to the industry average. Target's current ROI is 8.7%, and the company has a five-year average of 8.5% (MSN Moneycentral, 2011). These levels are below the industry average. Wal-Mart clearly has consistently superior ROI performance to Target.

The second criterion is the book value of the two firms, specifically the book value per share. Book value per share indicates the amount of money that could be gained from liquidating the company Wal-Mart's current book value per share is $19.49, while Target's is $22.00. This means that Target is worth more intrinsically than Wal-Mart; the added price in Wal-Mart's stock reflects what the market believes to be superior growth prospects.

The third criterion is dividend payout, which reflects the money that investors know they will receive from holding shares in these companies. Wal-Mart currently pays out an annual dividend of $1.46, while Target pays out $1.00 per share. The dividend yield for Wal-Mart is therefore 2.77%, while the dividend yield for Target is 2.00% (MSN Moneycentral, 2011). In terms of dividends, Wal-Mart is the superior investment of the two.

A trend analysis shows that Wal-Mart has seen increasing revenues over the past five years, including years where the company would perhaps have been expected to lose sales as the result of the economic downturn. Instead, Wal-Mart has continued to grow both revenues and net profit through this period. Target also saw slow but steady revenue growth even through the economic downturn. However, the company saw a reduction in profits during 2008 (fiscal 2009) and only last year was able to restore profitability to previous levels. Target therefore appears to be less recession-proof than Wal-Mart, and this may be related to the latter company's superior geographical diversification.

Both companies have healthy balance sheets. Wal-Mart's tight margins meant that it traditionally has what in some companies would be considered poor liquidity (current ratio below 1) but in general Wal-Mart has a stable balance sheet. The company's capital structure is debt-oriented, with 62% liabilities. Target is a much smaller company than is Wal-Mart, with assets only one-quarter those of the Arkansas giant. Target has healthier liquidity but as with Wal-Mart maintains a debt-heavy capital structure of 64.5% liabilities.

At the most basic level, both of these firms represent good investments. They are strong firms with healthy balance sheets and the ability to continue to grow revenues -- and for the most part profits -- even during the past few difficult economic years. The companies are trading at relatively low multiples and each is in a favorable position within its 52-week range.

However, Wal-Mart represents the superior investment of the two. In addition to being the industry leader and having better geographic diversification, Wal-Mart was able to increase profits even during the recession. Furthermore, Wal-Mart has a consistently better ROI, implying that the company's operations are more efficient. This superior efficiency reflects well given that the two companies have similar capital structures. There is little to choose from with respect to stock price and dividend policy, so it is the superior returns that Wal-Mart offers that give it the edge as an equity investment. In addition, the company's better ability to handle recession bodes well for future recessions.