Today, I want to compare Wal-Mart Stores, Inc. (NYSE:WMT) with Target Corporation (NYSE:TGT), its rival, on a value basis. But before we jump into a horse race between TGT and WMT stock, we should ask ourselves: What defines true value?
For every investor, it’s different.
Ben Graham used a very specific set of criteria to weed out impostors that were detailed in his seminal book, The Intelligent Investor. As good a book as it was, though, it’s rare to find someone today who follows Graham to a tee.
There are many reasons for this, but the biggest is that you wouldn’t find any stocks to buy, given low interest rates and record-setting stock markets.
George Athanassakos is a professor of finance at the Richard Ivey School of Business in London, Ontario. He’s also the founder of the Ben Graham Centre for Value Investing at Ivey. Needless to say, he’s obsessed with value investing.
In 2014, he wrote an article about how to choose undervalued stocks. It’s an excellent piece to use as a template for picking value stocks of any kind. And it’s his format I’ll use to compare WMT and TGT stock.
May the value battle begin.
Value Battle: Market Cap
This is simply a five-year comparison of Walmart and Target’s market cap growth — or lack thereof. Athanassakos applies a score of 1 for growth and zero for non-growth. At the end of the six comparisons, the stock that has the higher number will win this particular value battle.
Walmart and Target Market Cap
2011 | Current | Growth | |
WMT | $204.7B | $219.6B | 7.3% |
TGT | $34.4B | $44.1B | 28.2% |
Source: Morningstar
Pretty self-explanatory. Target gets one point.
Leader: TGT stock, 1-0
Value Battle: Stock Liquidity
Here, Athanassakos is looking for value stocks that are liquid in nature, because you never know when you might want to exit a position quickly. Both TGT and WMT are large-cap stocks with significant volume, but one of them clearly has greater liquidity.
Here you want to take the company’s average daily volume and divide that by the number of shares outstanding.
Walmart and Target Stock Liquidity
WMT | 2011 | 2016 |
Average Daily Volume (based on 252 days) | 13.5M | 8.7M |
Shares Outstanding | 3.5 billion | 3.2 billion |
Liquidity | 97.1% | 68.8% |
TGT | ||
Average Daily Volume | 8.8M | 5.3M |
Shares Outstanding | 683M | 595M |
Liquidity | 324.7% | 224.5% |
Sources: Morningstar, Wikinvest
In this case, I’m going to give one point to each because even though Walmart’s liquidity shrank at a slower rate than Target, Target’s overall liquidity is much higher.
Leader: TGT stock, 2-1
Value Battle: Asset Turnover
Here we’re interested in seeing which company is generating more revenue from its assets. We do this by looking at their assets and revenues from 2011 and today.
Walmart’s asset turnover in 2011 was 2.39; in 2016 it’s 2.35. Note: This means it’s generating 2% more revenue from the same dollar of assets.
Walmart and Target Asset Turnover
2011 | TTM | Increase | |
WMT | 2.39 | 2.35 | -2% |
TGT | 1.55 | 1.75 | 40% |
Source: Morningstar
Here again, I’m going to give one point to each because even though Walmart’s generating more revenue from a dollar of assets, Target is accelerating that number in a much more meaningful way and could catch Walmart if it’s not careful.
Leader: TGT stock, 3-2
Value Battle: Total Debt to Equity
This is a really straightforward examination of each company’s capital structure. Less debt and higher shareholders’ equity is ideal.
Walmart and Target Total Debt to Equity
2011 | TTM | Increase/Decrease | |
WMT | 66% | 54% | Decrease |
TGT | 85% | 109% | Increase |
Source: Morningstar
WMT wins a point in easy fashion in this particular comparison by actually reducing its debt while Target increased its.
Leader: Tie, 3-3
Value Battle: Cash to Assets
Finding quality companies involves looking under the hood to see how financially solvent a company is. One of the ways to do that is to see how much cash it has as a percentage of assets.
Why is this important? Any buyer would look favorably on a large stash of cash it could use to finance a purchase. In the case of Walmart and Target stock, where they are so big it’s unlikely anyone would attempt to buy them, it’s all about being able to take care of your short- and mid-term financial obligations.
Walmart and Target Cash to Assets
WMT | 2011 | 2016 |
Cash | $6.6B | $8.7B |
Total Assets | $193.4B | $199.6B |
Cash to Assets | 3.4% | 4.3% |
TGT | ||
Cash | $794M | $1.2B |
Total Assets | $46.6B | $38.6B |
Cash to Assets | 1.7% | 3.1% |
Sources: Morningstar, SEC
Since Target closed its Canadian business in April 2015, its ratio has improved dramatically, which is great news for investors who are looking for increased dividends and share repurchases. It now has the free cash flow to do so.
Target wins this round and a point.
Leader: TGT stock, 4-3
Value Battle: EBIT Growth Rate
Here, Athanassakos wants to see how well each company is growing their operating earnings before interest and taxes. It’s especially helpful when looking at a number companies operating in different sectors with different margins, etc.
Fortunately, Walmart and Target operate similar businesses, giving us and apples-to-apples comparison.
EBIT Growth Rate
WMT | TGT | |||
Operating Income | Growth | Operating Income | Growth | |
2010 | $25.5B | $5.3B | ||
2011 | $26.5B | 3.9% | $5.3B | 1.3% |
2012 | $27.7B | 4.5% | $5.7B | 7.6% |
2013 | $26.9B | -2.9% | $4.8B | -15.8% |
2014 | $27.1B | 0.7% | $4.5B | -6.3% |
2015 | $24.1B | -11.1% | $4.9B | 8.9% |
Average | -0.98% | -0.86% |
Source: Morningstar
The average of both Walmart and Target tell you all you need to know about retail and how many companies have fared, big and small, in the past couple of years.
Target has been able to deliver a slightly better performance when it comes to profitability over the past five years, which means the final point of this particular value battle goes to the pride of Minneapolis.
Target wins 5-3.
The Value Battle Winner: TGT Stock
Target’s current earnings yield is 7%, or 50 basis points higher than Walmart. That, combined with a strong earnings report and a 5-3 win over Walmart in the value battle, makes Target the clear victor.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.