There is no doubt the last 10 years have not been kind to Wal-Mart (NYSE:WMT) shareholders. In contrast, they have been very good for Amazon.com (NASDAQ:AMZN) investors, in fact, so good, that a $20,000 investment made just 10 years ago is worth a staggering $500,000 today. On the other hand, a WMT investment of the same amount would equal roughly that same $20,000 invested 10 years ago (however, at least a shareholder would of received about $4,000 in cash dividends, somewhat offsetting the pain of a very stagnant investment).
Price trends to diverge?: Since WMT has had virtually no appreciation the last 10 years and AMZN has had probably more than it deserved, it is safe to say that WMT will enjoy some nice appreciation during the next 10 years (it rose more than four-fold in the prior 10-year period: 1990-2000), while AMZN could be in store for some lackluster performance. Why? Because it is simply WMT’s turn, as it is sort of a “cyclical thing."
AMZN has had its day in the sun, and now is ready to go dormant, especially since its expectations have become way out of hand, while WMT’s expectations have gone in the opposite direction.
When you consider analysts are forecasting only a 11% WMT earnings rise in 2013 ($4.48 to $4.89) and a forward multiple of 11, versus AMZN’s forecast of a whopping 62% increase ($1.97 to $3.22) or a forward multiple of 68, it is clear that AMZN has it work cut out for itself.
What do you think is easier to accomplish, 11% earnings growth or 62%? AMZN’s high expectations could be setting it up for a fall. Should AMZN be selling at a valuation of six times that of WMT? Probably not, but Mr. Market grants that honor to the “king of online sales” because its expected growth rate is so much higher, almost six times to be exact, coincidentally, the same as its price premium to WMT. Funny how that works out.
Book value, debt and ROI’s compared: Although WMT is selling at only three times its book value, versus 17 times for AMZN, it is only fair to point out that AMZN is basically debt free, while WMT carries nearly $50 billion in debt, net of cash. If you calculate each stock’s ROI, the difference is staggering, as WMT would yield 9.3% ($4.89/$52.45) while AMZN’s return on investment would be a paltry 1.76% ($3.89/$220), amounting to less than a risk free, five year bank CD.
The bottom line: AMZN’s market cap puts it only 4% from its all time high, while WMT, with a market cap of $180 billion, is still 20% shy of its record close. AMZN will be facing some headwinds such as sales tax challenges, intensified online competition and cost escalations, while WMT is ready to take advantage of some tailwinds. Now is not the time to be greedy, so ringing the cash register and booking some AMZN profits seems like a logical approach at this juncture, besides nobody ever went broke taking profits.
WMT is a stock that enables you to sleep better at night because of its low valuation and substantial dividend yield. The largest private employer in the U.S. has a slogan that works: “Save money live better." That slogan “fits to a tee” what investors are looking for these days: The opportunity to buy a stock on sale that enhances the quality of their life.
Disclosure: I am long WMT.