Target Corporation (NYSE:TGT) shares are up more than 13.41% this year and recently increased 4.62% or $3.27 to settle at $74.00. Wal-Mart Stores, Inc. (NYSE:WMT), on the other hand, is up 1.29% year to date as of 01/11/2018. It currently trades at $100.02 and has returned 0.48% during the past week.
Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TGT to grow earnings at a -4.18% annual rate over the next 5 years. Comparatively, WMT is expected to grow at a 5.80% annual rate. All else equal, WMT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 6.18% for Wal-Mart Stores, Inc. (WMT). TGT’s ROI is 15.50% while WMT has a ROI of 13.40%. The interpretation is that TGT’s business generates a higher return on investment than WMT’s.
Cash is king when it comes to investing. On a percent-of-sales basis, TGT’s free cash flow was 0% while WMT converted 0.34% of its revenues into cash flow. This means that, for a given level of sales, WMT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. TGT has a current ratio of 1.00 compared to 0.80 for WMT. This means that TGT can more easily cover its most immediate liabilities over the next twelve months. TGT’s debt-to-equity ratio is 1.13 versus a D/E of 0.66 for WMT. TGT is therefore the more solvent of the two companies, and has lower financial risk.
TGT trades at a forward P/E of 16.93, a P/B of 3.62, and a P/S of 0.58, compared to a forward P/E of 21.04, a P/B of 3.92, and a P/S of 0.60 for WMT. TGT is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. TGT is currently priced at a 18.68% to its one-year price target of 62.35. Comparatively, WMT is -1.62% relative to its price target of 101.67. This suggests that WMT is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for TGT and 2.30 for WMT, which implies that analysts are more bullish on the outlook for TGT.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. TGT has a beta of 0.62 and WMT’s beta is 0.37. WMT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. TGT has a short ratio of 6.10 compared to a short interest of 3.43 for WMT. This implies that the market is currently less bearish on the outlook for WMT.
Wal-Mart Stores, Inc. (NYSE:WMT) beats Target Corporation (NYSE:TGT) on a total of 8 of the 14 factors compared between the two stocks. WMT is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, TGT is the cheaper of the two stocks on an earnings, book value and sales basis, WMT is more undervalued relative to its price target. Finally, WMT has better sentiment signals based on short interest.