Face-Off of the Giant Retailers: Target vs. Wal-Mart

Many investors wonder whether TGT or WMT look good for new money today. The key variable here is what earnings multiples will be appropriate for our future share price projections.

Here's my take on each:

Target Corp. (TGT) March 27, 2008 close: $50.98

52-week range: $47.01 [1/22/08] - $70.75 [7/13/07]

Yield = 1.1%

Target has posted higher EPS in each year since FY 1996. Total revenues have never declined year-over-year [data going back to 1991]. Value Line assigns TGT shares an 'A' for financial strength and 90^th and 95^th percentile rankings for stock 'price growth persistence' and 'earnings predictability' respectively. [100^th being best]

FY……….Rev/Share…….EPS……Annual Dividend

2000………$41.11……...$1.38……….$0.21

2001………$44.07……...$1.56……….$0.22

2002………$48.27……...$1.81……….$0.24

2003………$52.82……...$2.01……….$0.26

2004………$52.59……...$2.07……….$0.30

2005………$60.20……...$2.71……….$0.38

2006………$69.19……...$3.21……….$0.42

2007………$76.70……...$3.34……….$0.52

Latest 5-year CAGRs:

Sales………8.5%

Earnings….13.0%

Dividends...12.0%

EPS increased faster than revenues as net profit margins expanded from 3.8% to 4.5% from FY 2002 to FY 2007. Last year's EPS grew only 4.05%.

Over the years Target's normalized P/E has been all over the map. From 1991 – 1997 it averaged 15.9x. From 1998 through 2004 it averaged 21.9x.

Over the past three years it's been around 18x.

FY 2007 had final EPS of $3.34 and consensus estimates for FY 2008 now run $3.55. Target shares are now 15.3x trailing and 14.4x projected earnings making them look mildly under-priced.

If you assume a 16 multiple on year-ahead estimates these shares could be $56.80 by this time next year or plus 11.4% from today's close. With the 1.1% yield I could see a total return of about 12.5% - reasonable but not exciting.

Wal-Mart Stores: (WMT) March 27, 2008 close: $52.37

52-week range: $42.09 [9/10/07] - $54.15 [3/24/08]

Yield = 1.68%

Wal-Mart has posted higher sales, dividends and EPS in each year since at least 1991. Value Line assigns WMT an 'A++' financial strength rating and puts its earnings predictability in the top 1% of its 1700 stock universe.

FY……….Rev/Share…….EPS……Annual Dividend

2000………$42.80……...$1.40……….$0.23

2001………$48.91……...$1.50……….$0.27

2002………$55.64……...$1.81……….$0.30

2003………$59.46……...$2.03……….$0.35

2004………$67.36……...$2.41……….$0.48

2005………$75.01……...$2.63……….$0.58

2006………$83.51……...$2.92……….$0.65

2007………$93.63……...$3.13……….$0.83

Latest 5-year CAGRs:

Sales……...12.0%

Earnings….11.5%

Dividends...20.0%

Wal-Mart's EPS and sales growth pretty much kept pace over the past five years as net profit margins barely increased going from 3.3% to 3.4% over that time span.

Over the years Wal-Mart's normalized P/E has been erratic. From 1991 – 1997 it averaged 24.9x. From 1998 through 2004 it averaged 31.9x.

Over the past three years it's been around 16.4x.

FY 2007 had final EPS of $3.13 and consensus estimates for FY 2008 now run $3.40. Wal-Mart shares are now 16.7x trailing and 15.4x projected earnings. It is noteworthy that when WMT shares bottomed last September at $42.09 they were clearly under-priced at just 13.44x last year's actual earnings- the lowest multiple for Wal-Mart ever. That explains why these shares have increased over 24% since then against the tide of falling markets. That good performance since last Fall has made WMT shares less attractive now.

If you assume a 16 multiple on year-ahead estimates these shares could be $54.40 by this time next year or plus 3.9% from today's close. With the 1.7% yield I could see a total return of only 5.6%.

Conclusion: Unless you expect higher P/Es on either of these shares over the next few years then neither one looks very exciting. Both of them look slightly cheaper than they deserve but I think there are much better bargains available right now elsewhere.

Disclosure: No positions.