All of the listed companies below are operating well-known retailing businesses. Competition in this industry is stiff, making it generally one of my least loved industries compared to commodity or technology companies which have significant potential to apply innovation to enhance profitability.
Retailers, on the other side, typically have low operating and profit margins as switching costs for consumers are usually quite low and companies such as Wal-Mart (WMT), Target (TGT), Costco (COST) and JC Penney (JCP) compete on price. Indeed, retailers often initiate price competition in pursuit of store traffic and sales growth that cuts deeply into margins and profitability.
Wal-Mart
WMT is a US based retail giant with a market cap of $229 billion. WMT operates supermarkets and centers, restaurants and discount stores worldwide with a heavy concentration in the United States.
WMT trades at $67.81 at the higher end of its 52 week trading range of $48.31-68.48. WMT has a P/E of 13 (forward P/E). With low dividend payouts of 1-2% and low operating margins (5.9%) as well as profit margins (3.5%), WMT does not deserve a premium multiple that would justify a higher valuation. I estimate a 2013 EPS of $4.9 making the stock overvalued at that point of time. In addition, the stock had a major run-up recently and trades close to its 52 week high limiting capital gains. Investors should take profits in anticipation of a pull-back.
Mean analyst estimates for WMT stand at $5.34 and fetch 16 holds, 6 strong buys and 5 buy ratings. Only one analyst recommends to sell the stock.
JC Penney
JCP operates department stores located in the US and Puerto Rico. The company specializes in footwear, accessories and other fashion related clothing items.
JCP has a market cap around $5 billion which is only a fraction of WMT's market valuation. Not only is JCP materially smaller than WMT, the charts of the companies could not look more different. JCP trades at $22.25, close to its 52 week low of $21.57. The company is going through major store design changes since well-known activist investor Bill Ackman purchased a stake in JCP last year and hired a new CEO. So far, the stock price development could not match those high expectations arising from Bill's purchase.
However, the decline in stock price presents a good opportunity to capitalize on core changes made at JCP under the leadership of CEO Johnson and investor Ackman. The forward P/E stands at only 9. With a purchase of JCP stock investors bet that the company can turn around faltering sales and catch up to competitors. In my opinion the company is undervalued based on the potential for improvement and the backing of high-profile leaders.
