Why Not Own Wal-Mart and Target?

by Jonathan Berr | April 20, 2012 11:09 am

Wal-Mart Stores Inc. (NYSE:WMT[1]), whose shares have lagged behind those of Target Corp. (NYSE:TGT[2]) — this year gaining 3% versus its smaller rival’s 11% increase — may be poised for a comeback. And Target may be poised for a run-up as well.

Both companies have their fans and detractors. Investors who can’t make up their minds between the two retailing stocks should buy them both, particularly since confidence seems to be holding.

Buying Wal-Mart is a bet that CEO Mike Duke will be able to revive the company’s U.S. sales, while buying Target signals confidence that CEO Gregg W. Steinhafel will be able to maintain Target’s momentum from earlier in the year. There are cases to be made for both companies.

The world’s largest retailer is trading at a multiple of 13.66, near its five-year low of 13.4, according to Reuters[3]. Wall Street expects sales at Wal-Mart to gain 5.95% this year, versus Target’s 3.67%. The Bentonville (Ark.) company expects earnings per share to rise 8.47%[4], versus a 6.98% gain at Target. Wal-Mart’s sales growth is expected to top Target’s in three and five years as well.

Under CEO Mike Duke, Wal-Mart has been aggressively cutting prices to lure shoppers back to its 4,400 stores in the U.S. While the effort has cut margins, it has paid off: In the fourth quarter, Wal-Mart reported a 1.5% gain in comparable store sales at its U.S. stores, the second quarter in a row the retailer has posted a gain in that important metric.

By comparison, Target trades at a price-to-earnings ratio of 13.38[5], well above its five-year low of 10.9. The No. 2 retailer recently raised its first quarter guidance[6] since it has benefited from warmer weather and an early Easter.

Investors continue to have high hopes for Minneapolis-based Target. The average 52-week price target on the stock is $63.50, about 12% higher than where it currently trades. Wal-Mart’s shares, by contrast, are expected to rise during that same time to $63.99, about 3% higher than where they recently have traded.

Wal-Mart currently is sitting on more than $6 billion in cash[7], which gives it plenty of firepower to afford the low prices it charges consumers and spruce up its stores or do whatever it feels like. By contrast, Target’s cash hoard is only about $600 million[8]. When it comes to dividends, Wal-Mart is the clear leader there, too, yielding 2.6% to Target’s 2.1%.

One of the reasons Wal-Mart’s shares may be a better buy than Target’s right now is that Wall Street has punished the country’s largest private employer for its poor performance. For instance, Wal-Mart posted disappointing holiday season sales[9]. Target’s performance wasn’t great, either, but sales rebounded early this year[10], assuaging investors’ concerns.

Target is planning an aggressive  move into the grocery business[11], which spells trouble for the incumbents. Wal-Mart, also a player in groceries, is hoping to expand its online footprint in an attempt to catch up with Amazon.com Inc. (NASDAQ:AMZN[12]). The retailer has acquired five e-commerce companies and is adding more than 200 workers to its @WalmartLabs digital unit.

Since Wal-Mart and Target will both benefit from an economic rebound, there’s no reason investors shouldn’t hedge their bets and own both.

Jonathan Berr is long Wal-Mart and Target. Follow him on Twitter @jdberr.

  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  3. according to Reuters: http://www.reuters.com/finance/stocks/financialHighlights?symbol=WMT
  4. earnings per share to rise 8.47%: http://www.reuters.com/finance/stocks/financialHighlights?symbol=TGT
  5. Target trades at a price-to-earnings ratio of 13.38: http://www.reuters.com/finance/stocks/financialHighlights?symbol=TGT
  6. recently raised its first quarter guidance: http://www.marketwatch.com/story/target-raises-outlook-on-strong-same-store-sales-2012-04-05
  7. Wal-Mart currently is sitting on more than $6 billion in cash: http://www.google.com/finance?q=NYSE:WMT&fstype=ii
  8. Target’s cash hoard is only about $600 million: http://www.google.com/finance?q=NYSE:TGT&fstype=ii
  9. Wal-Mart posted disappointing holiday season sales: http://money.cnn.com/2012/02/21/news/companies/walmart_earnings/index.htm
  10. sales rebounded early this year: http://www.marketwatch.com/story/target-sales-rebounded-after-weak-holiday-season-2012-02-23
  11. Target is planning an aggressive  move into the grocery business: http://supermarketnews.com/retail-amp-financial/target-sets-more-food-expansion
  12. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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