Happy Black Friday! Which stock is a better value right now - TGT or WMT?

November 23, 2018

Happy Black Friday! Which stock is a better value right now – TGT or WMT?

It’s an annual thing – the day after Thanksgiving marks the official start of the holiday shopping season. Anxious to get a jump on the best deals of the season, shoppers line up outside stores all over the country. It also marks a point in the year when the stock market starts to pay even closer attention to the retail sector than normal. Economists like to compare sales starting today and running through the end of the year on a year-over-year basis to try to gauge the economy’s overall health. In a market environment that has been marked by uncertainty more in the last six weeks than it has in years, this holiday season is sure to be scrutinized and analyzed as nauseam. Don’t be surprised to see reports measuring and analyzing not just sales numbers, but also foot traffic in retailers and malls across the nation, to say nothing of online sales.

Last year, as AMZN announced and completed its merger with Whole Foods, some analysts and reports began speculating about the end of relevance for traditional retailers, including big-box stores like Walmart (WMT) and Target Stores (TGT). And it certainly seems to make sense that as Amazon’s sales have increased nearly 30% over the past year, it has come at the expense of traditional brick-and-mortar stores. Here’s how it breaks down over the past year for four of the best-known names versus the Amazon juggernaut:

  • Amazon: +29.33%
  • Walmart: +1.39%
  • Target: +6.92%
  • Kohl’s: +6.83%
  • Big Lots: +.07%

Despite these mostly lackluster sales figures for so many of the stocks in the retail sector, there are some solid fundamentals that underpin many of them. And as the market has dropped into correction territory, it’s taken retail stocks with it; as measured by the S&P Consumer Discretionary SPDR ETF (XLY) is down almost 14% since the beginning of October. That has pushed TGT down about 16% over the same period, and WMT about 11%. Does that mean these stocks have reached attractive valuation levels? Let’s take a look.

Target Stores (TGT) Current Price: $69.26

TGT is a company with a pretty impressive fundamental resume. While sales growth over the last year was mostly lackluster, earnings actually grew nearly 20% over the same period. TGT has managed to answer the question about their ability to stay relevant in the face of increasing competition from Amazon as well as Walmart better than many other traditional retail stores. One of the things TGT has been able to do successfully is to leverage their web presence effectively, not only for marketing purposes, but also as its own driver for sales – something that is inarguably going to be necessary for any retailer to stay relevant; the recent or pending failures of other well-known retailers like Toys-R-Us, Sears (SHLD) and JC Penney (JCP) certainly seem to offer cautionary tales for the inability to shift operational and business models around changing consumer trends.

Here are a few other useful fundamental measurements:

  • Free Cash Flow: this number is very healthy, at more than $3.5 billion, and which translates to an attractive Free Cash Flow Yield of nearly 10%.
  • Return on Equity/Return on Assets: these numbers also represent high growth figures. ROE is 25.02 and ROA is 6.99.
  • Debt to Equity: TGT’s Debt/Equity is higher than I usually prefer to see, at about 1.1; however the company’s balance sheet shows that their operating margins are sufficient to service their debt. The company has a little over $10 billion in long-term debt, versus about $1.1 billion in ash and liquid assets, which suggests that liquidity is adequate.

From a valuation standpoint, TGT has a current Book Value of $21.05, which means that at their current price, their Price/Book Value is 3.29. That actually puts the stock only about 1% below their historical average, which means the stock is fairly valued right now. This is a fundamentally strong company, with a stock price that is higher than I would prefer to see right now as a value-oriented investor. The represent a good value, the stock would actually need to drop about 20% below the roughly $70 price its historical Price/Book value provides as a long-term fair value target. That undervalued price starts at around $56 per share.

Walmart Stores (WMT) Current Price: $94.17

WMT is a company that the market has used as a bellwether for both the consumer staples and consumer discretionary sectors for years. The company’s sales have been mostly flat for the past year, and compared to TGT, their earnings have also trailed, growing only about 8% over the same period. Even amid mounting pressure from AMZN, however, WMT remains the 600-pound gorilla of retail stocks, and that isn’t something that is likely to change anytime soon. WMT has worked to answer the AMZN threat aggressively, pushing to expand their web presence, with their own web site as well as with acquisitions like online retailer jet.com.

  • Free Cash Flow: this number is very healthy, at more than $18.8 billion; compared to TGT, however, it is actually lower on the basis of Free Cash Flow Yield, which is only about 6.7%.
  • Return on Equity/Return on Assets: these numbers are healthy, albeit lower versus TGT. ROE is 18.36 and ROA is 6.81.
  • Debt to Equity: WMT’s Debt/Equity is much lower than TGT, at only .63. The company’s balance sheet shows operating profits are more than adequate to service the debt they have, with better overall liquidity than TGT. WMT has about $15.8 billion in cash and liquid assets versus $43.2 billion in long-term debt.

From a valuation standpoint, WMT has a current Book Value of $26.83, which means that at their current price, their Price/Book Value is 3.5. That actually puts the stock almost 9% above their historical average, which means the stock is somewhat overvalued right now. Like TGT, this is a fundamentally strong company, with a stock price that remains higher than any value investor would consider attractive despite its decline into correction territory. Realistically speaking, WMT would need to drop to about $67 before it would really represent a strong value.

To answer the question in today’s headline, the truth is that TGT is a better value than WMT right now. It is also true, however that neither stock is trading at a level that a serious value investor would consider working with yet. If the bearish momentum of the past six weeks continues to push these stocks lower, they could reach attractive valuations in the months ahead, and so they are certainly worth paying attention to. The smart move, however is to be patient and to wait for the market to offer the right opportunity to work with these stocks at a price that offers a better value than they represent today.