Walmart Inc. (NYSE:WMT) shares are down more than -10.94% this year and recently increased 0.57% or $0.5 to settle at $87.95. ONEOK, Inc. (NYSE:OKE), on the other hand, is up 7.84% year to date as of 03/20/2018. It currently trades at $57.64 and has returned -0.21% during the past week.
Walmart Inc. (NYSE:WMT) and ONEOK, Inc. (NYSE:OKE) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WMT to grow earnings at a 6.86% annual rate over the next 5 years. Comparatively, OKE is expected to grow at a 24.20% annual rate. All else equal, OKE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 15.88% for ONEOK, Inc. (OKE). WMT’s ROI is 13.40% while OKE has a ROI of 5.40%. The interpretation is that WMT’s business generates a higher return on investment than OKE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. WMT’s free cash flow (“FCF”) per share for the trailing twelve months was +2.22. Comparatively, OKE’s free cash flow per share was -0.21. On a percent-of-sales basis, WMT’s free cash flow was 1.31% while OKE converted -0.71% 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
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. WMT has a current ratio of 0.80 compared to 0.70 for OKE. This means that WMT can more easily cover its most immediate liabilities over the next twelve months. WMT’s debt-to-equity ratio is 0.66 versus a D/E of 1.65 for OKE. OKE is therefore the more solvent of the two companies, and has lower financial risk.
WMT trades at a forward P/E of 16.71, a P/B of 3.44, and a P/S of 0.51, compared to a forward P/E of 21.57, a P/B of 4.02, and a P/S of 1.90 for OKE. WMT 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. WMT is currently priced at a -16.49% to its one-year price target of 105.32. Comparatively, OKE is -8.86% relative to its price target of 63.24. 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 2.40 for WMT and 2.30 for OKE, which implies that analysts are more bullish on the outlook for WMT.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. WMT has a beta of 0.56 and OKE’s beta is 1.27. WMT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. WMT has a short ratio of 3.32 compared to a short interest of 3.33 for OKE. This implies that the market is currently less bearish on the outlook for WMT.
Walmart Inc. (NYSE:WMT) beats ONEOK, Inc. (NYSE:OKE) on a total of 11 of the 14 factors compared between the two stocks. WMT generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, WMT 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.