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Discounting Death Match: Wal-Mart vs. Costco

COST is up after declaring special dividend, but is it the better buy?

   

Judging from today’s action, Costco (NASDAQ:COST) appears to be a superior investment compared to big-box discount competitor Walmart (NYSE:WMT).

Costco shares are up an impressive 6% on news of a special dividend, while shares of Walmart struggled to stay in the black this morning and are coming off an 11% slide that started in the middle of last month.

Stocks and companies are bigger than just one day’s action, however, and should be treated as such. So, if you only have room for one discount retailer in your portfolio, should it be Walmart or Costco? Let’s take a look.

The Case for Costco

Generally speaking, the $5.50 gain COST has seen today makes sense … though not for the reason you might assume.

In an effort to distribute some otherwise-unused cash before tax rates (likely) increase in 2013, the company has elected to pay a one-time dividend of $7 in mid-December. Today’s advance reflects a good chunk of the extra payout investors are going to be receiving on Dec. 18.

Still, to buy-in solely on the news doesn’t make sense because the stock’s apt to decline in value by a full $7 per share once it goes ex-dividend in the middle of next month. The real question, then, is what Costco really brings to the table to justify today’s big gains.

As it turns out, it brings quite a bit.

Sure, one month doesn’t make or break a retailer any more than one day makes or breaks a stock, but to the extent that it matters, Costco had a fairly kick-butt fiscal November in terms of sales. Same-store sales were up 6% and — even factoring in volatile gasoline process and currency fluctuations — the retailer saw a 5% uptick in last month’s top line.

Throw in three straight earnings beats, a record fiscal Q3 income (and what will likely be a record Q4) and a 13.6% annual earnings growth rate, and there’s a lot to like.

The Case for Walmart

Of course, it’s not like Walmart is some wannabe slouch. The world’s largest retailer has also topped earnings estimates in each of its last three quarters and is also posting record sales and profits.

So why did WMT shares get torpedoed in mid-October? Part of it certainly had to do with the fact that the stock was technically overbought and tiptoeing into new-high territory. The bulk of the pullback, however, was spurred by a resurfacing of the company’s ongoing PR nightmare: labor problems and the subsequent threat of an employee walkout right at the time the stores needed employees the most — the weekend after Thanksgiving.

As has been the case most of the time this has come up, however, Walmart weathered the storm; the bark of the threat was worse than the bite.

Avoiding bad news is one thing; creating good news is another. Walmart has proactively done more than you might guess for investors lately, though.

Walmart has spent the last year making at least a small dent in its shaky customer service experience, an uncompetitive online shopping experience and its “profits over people” mentality. Examples of online efforts include an in-store pickup and same-day delivery, plus a “pay with cash” feature.

Walmart also “won” Black Friday, according to some analyst … whatever that means. And, the company even had the guts to sever ties with a supplier that violated a human-safety mandate now requisite for all of Walmart’s vendors.

So far, all the measures appear to have helped the top and bottom lines rather than crimp them. And, given that all the measures are permanent fixes — not just temporary holiday services — Walmart may well be able to keep whittling away at a less-than-positive stigma.

The Winner

With all that being said, there’s still another element that needs to be considered: valuation.

A P/E ratio is never the whole story, but it’s still a good measure — especially for two companies as similar as Walmart and Costco. And based on valuation, Walmart is clearly the better stock. It’s trading at around 15 times its trailing income and 13 times its projected earnings.

Costco shares, on the other hand, are priced at 26 times their trailing profits and 20 times their forward-looking earnings. Costco might bring a slightly better growth rate to the table, what what Walmart lacks in speed it makes up for in reliability.

In the end, Walmart has more to offer investors than Costco right now. The world’s biggest retailer has quietly been quelling many of its nagging problems, which the market’s going to figure that out sooner or later, and it boasts a better valuation.

All in all, Costco’s special dividend is nice, but Walmart’s still the winner.

As of this writing, James Brumley did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/11/discounting-deathmatch-wal-mart-vs-costco/.

©2014 InvestorPlace Media, LLC

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