Is this Retailer Still a Good Investment?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wal-Mart (NYSE: WMT), after underperforming in the first quarter,  is up over 25% year to date, compared to the S&P’s 14%. With revenues expected to be up 6% next year due to 8% growth in international sales, the company continues to excel despite global economic weakness. Many investors are seeing Wal-Mart not only as a safe haven that can provide protection against a decaying economy, but also as stock that can perform positively in a rebounding economy.

Wal-Mart is a Warren Buffett favorite, but also a favorite of Boykin Curry and Geore Soros. All three of these managers had over 4% of their fund’s 2Q 13F portfolio invested in Wal-Mart. Jim Simons took an interest in Wal-Mart during the second quarter, increasing his stake over 2,000% to 3.7 million shares.

The one company that seems to be slowing every retailer down is Amazon (NASDAQ: AMZN). Wal-Mart took a direct stab at Amazon last month when it announced that it would no longer sell Amazon’s Kindle e-readers and tablets. However, even though Amazon is being blamed for various poor performances of retail companies only about 7% of total U.S. retail sales were e-commerce transactions in 2011. This number is expected to rise to 9% in 2016.

Apart from Amazon, Wal-Mart sees competition from Target (NYSE: TGT) on a broad basis, considering it's Wal-Mart’s toughest competitor on a department retail store basis. The company has seen positive boosts in same store sales, which is expected to be up 3.6% in 2013. Target has lagged Wal-Mart with adoption of food, but Target now plans to remodel its stores to its ‘PFresh’ format. This will add fresh foods to Target stores and should be a key driver for adding value to customers and traffic to Target’s stores, which is expected to allow the company to grow sales 6% in 2013.

However, Wal-Mart is also seeing competition from other companies such as Costco (NASDAQ: COST). The membership wholesale company is not up as much as Wal-Mart year-to-date, but continues to meet consensus estimates and saw EPS estimates for 2013 raised by $0.05 to $4.47. Earlier last week the company posted it latest fiscal quarter results, with sales and operating income higher than expected. S&P recently raised its price target to $113 on strong customer traffic and membership renewals; the company currently trades around $97.50. Keep in mind that Costco is a strong and growing company, with almost $5 billion of cash on hand compared to debt of only $1.5 billion.

Also worth noting is the rising popularity of discount retailers, including Dollar General (NYSE: DG). Dollar General, thanks in part to a weak economy, expects sales to be up 9% for 2013 and 5.2% same-store sale increase. Dollar General trades a trailing P/E of 19, but a forward P/E of 14, which is indicative of the company’s planned expansion into California and the Northeast.

From a valuation standpoint, Wal-Mart and Target trade in line with similar P/E and P/S ratios, and dividend yield. However, Wal-Mart dominates with respect to revenue generation, generating over 6 times the revenue that Target does. We believe that Wal-Mart is a solid investment given its diversity and ability to appeal to a variety of consumers regardless of the economic situation.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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