Which of These Discount Retailers Is the Best Buy?

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The discount retailer landscape is dominated by three companies in the United States.  These companies have had great runs since the 2008 recession, with some trading at price-to-earnings ratios higher than their historical averages.  While many discount retailers do pay dividends to shareholders, and grow them at double-digit percentages on an annual basis, some of these companies dividend yields trail the broader market.  Here are 3 high-quality companies, and their value propositions:

Wal-Mart (NYSE: WMT) is the king of retailers in the United States.  With a market capitalization of $230 billion and annual revenues of more than $460 billion, Wal-Mart is one of America’s juggernaut companies.  Wal-Mart has more than 2 million employees and operates more than 10,000 stores in over 25 countries.  Although its stock is off its 2-year high of $75 per share, shares are up more than 27% since the beginning of 2010.  Wal-Mart was trading at a trailing P/E ratio of 11 in July 2011, but after its run up, now trades at a trailing P/E of more than 14.  Wal-Mart showed solid growth in net sales of almost 6% in 2012.  Analysts expect $4.92 in earnings for fiscal 2013, representing growth of almost 10%.  Wal-Mart has grown its dividend by 12% percent annually over the last five years, but its current yield of only 2.3% is likely to deter many income investors.

Target (NYSE: TGT) is a $40 billion company that competes directly with Wal-Mart.  Target appears to be slightly cheaper than Wal-Mart with a lower P/E ratio of 13.5, and a lower price-to-book ratio of 2.5.  In November, Target reported adjusted earnings per share of $0.90, up 4.3% from the third quarter 2011.  Target also provided fourth quarter earnings guidance of $1.64-$1.74.  At current prices, Target is trading at between 13 and 14 times 2012 earnings including its expected fourth quarter results.  Target’s growth expectations are fueled by its first store openings in Canada, to be completed in 2013.  Target has an outstanding dividend history, having more than doubled its dividend since 2008.  Still, the yield is on par with Wal-Mart’s, of roughly 2.3%

Costco (NASDAQ: COST) has had solid growth in sales and earnings since the financial crisis and even better share price performance.  The stock has increased more than 70% since the beginning of 2010.  Even though Costco’s net sales and net income have grown 8% and 7.7%, respectively, over the last four years, the stock now trades at a trailing P/E ratio of almost 25.  Costco has nearly doubled its dividend since 2008, but because of the dramatic surge in the company’s stock price, its current yield is barely more than 1%.  Investors may be wise to wait for a better entry point for Costco, as the company is trading at a forward P/E ratio of more than 20.

Each of these three companies has provided investors solid growth in net sales and earnings.  In addition, Wal-Mart, Target, and Costco have provided investors double-digit percentage dividend growth.  At the same time, shares of each of these stocks have enjoyed big run-ups over the past few years.  Wal-Mart and Target appear to be fairly valued, with Costco getting a clear valuation premium to its peers.  I'm waiting for a more attractive entry point before buying stock in any of these three companies. In particular, investors of Costco should monitor the company’s performance going forward to ensure its growth keeps up with the high expectations imbedded in its stock price.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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