Being a discount retailer coming out of the dot.com recession of a decade ago was a pretty good place to be. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), the two biggest discount chains, were sitting pretty and offering investors defense as cash-strapped consumers traded down from department stores in search of bargains and everyday low prices.
My, how times have changed. Wal-Mart, the world’s biggest retailer, and Target, the chic-cheap discounter, are just now regaining their footings in the long aftermath of the Great Recession.
New competition in the rise of the dollar stores and online retailers like Amazon (NASDAQ:AMZN) is partly to blame. But it’s also the case that low-income customers have been disproportionally hammered by joblessness, high gas prices and a housing market that’s fallen and can’t get up.
Wal-Mart’s stock jumped Thursday after the company’s latest quarterly earnings beat expectations, and Target’s latest results beat the Street, too. In both cases, the retailers showed indications that they’re making the necessary adjustments to get back on track in the toughest economic environment they’ve ever faced.
Sure, doubling down on discounts or everyday low prices helped drive revenues, but only by putting already thin profit margins in jeopardy. And although a warm spring, early Easter and easing gas prices helped Wal-Mart and Target rebound from a weak end of 2011 to post solid first-quarter results and outlooks, those boosts don’t guarantee a thing as we head into the second half of the year.
So which stock is a better buy right now? Let’s take a look at some key metrics to decide which one appears to offer more upside over the next 12 to 18 months:
Revenue growth: Target
Analysts, on average, forecast Wal-Mart’s revenue to grow 5.6% this year and 4.5% next year. Target’s top line is expected to grow just 4.9% this year but then expand handsomely to 5.5% in 2013. The market is forward looking, so Target wins by a nose on accelerating revenue growth.
Profit growth: Target
Wall Street forecasts Wal-Mart’s profit to increase 8.2% this year and 8.6% in 2013. Target, meanwhile, is expected to grow earnings by just 0.5% this year before bouncing back to 13.3% next year. Wal-Mart offer steady, incremental growth, but Target is expected to posts huge year-over-year gains — always a nice catalyst for a stock. Furthermore, Target’s five-year growth forecast stand at 11%, better than Wal-Mart’s estimate of 8.3%.
Wal-Mart trades at a 13% discount to its own five-year average on a forward earnings basis and a 5% discount by trailing earnings, according to data from Thomson Reuters Stock Reports.
Target trades at an 18% discount to its own five-year average on a forward earnings basis and a 12% discount by trailing earnings. That makes Target look to be the better bargain.
Price targets: Target
Analysts’ median price target on Target stands at $65, according to Thomson Reuters data. Add in the dividend, currently yielding 2.2%, and the implied upside comes to 21% in the next 12 months or so. Wal-Mart’s median price target stands at $64. Add in the dividend yield of 2.7%, and the implied upside comes to 5.3% in the next 12 months or so.
Share-price momentum: Tie
Based on one-, three- and six-month relative strength and seasonality factors, both Wal-Mart and Target display price momentum that’s relatively in-line with broader market performance.
Verdict: Given its accelerating revenue and profit profile and more compelling valuation, Target appears to have more upside in the next 12- to 18-months. Keep in mind, however, that despite having similar betas (or volatility metrics), Target has taken investors on a much wilder ride over the previous three-, five- and 10-year periods.
If you’re bullish on the economy and market, Target is a better offensive play than Wal-Mart. However, if you’re looking to play defense, Wal-Mart’s superior dividend and relative share-price stability make it a solid choice for investors keen on equity income.
As of this writing, Dan Burrows doesn’t hold a position in any securities mentioned here.