Target Vs. Wal-Mart: Go With The Winner

Includes: TGT, WMT
by: Pey Shadzi

Being the eternal instigator that I am has placed me in a considerable amount of trouble over the years. Whether it was starting ruckus with the drama department back in high school, prompting a violent debate on which Shakespeare masterpiece was "the most splendid" or causing a physical brawl with my buddies over which automaker, Ford or Chevy, was the most "rugged." Let's just say both scenarios ended in bloodshed.

So, in order to continue my streak, I bring up to you the heated question of the day: Who is superior: Target or Wal-Mart? I wouldn't be surprised to see a few fists flying over this one, so let's get into it. First, let's introduce the contenders:

In the blue corner we have Wal-Mart Stores Inc. (NYSE:WMT), heavyweight champion of the Consumer Non-Discretionary category, weighing in at a market cap of $208 billion. WMT has a beta of 0.45, annual revenue of $450 billion, $6.5 billion cash on hand, forward P/E of 11.5, current ratio of 0.88, dividend yield of 2.6% and a payout ratio of 32%. The stock is trading near the higher end of its 52-week range.

In the red corner we have Target Corp. (NYSE:TGT), the inevitable underdog of the match, weighing in at a market cap of $38 billion. TGT has a beta of 0.90, annual revenue of $70 billion, $794 million cash on hand, forward P/E of 12.0, current ratio of 1.15, dividend yield of 2.1% and a payout ratio of 26%. The stock is trading near the higher end of its 52-week range.

So who's the winner?

Well, that may be difficult to tell which is why the debate inevitably rolls on. Target is doing well by many measures such as revenue growth, reasonable valuation, good cash flow from operations, enviable recent performance over the last year and admirable return on equity. On the downside, many feel their debt load, coming in at about $17.5 billion, is a bit on the high side. Wal-Mart, on the other hand, is doing quite well having a decent run-up of over 16% over the last year along with a growth in earnings, revenue growth, reasonable valuation and return on equity. This year analysts expect an improvement in earnings to $4.85 from $4.55 a year prior.

Perhaps you like international exposure that WMT brings to the table or you are excited about the fact that TGT has plans to offer a $3 a share dividend by the year 2017. Maybe you feel Target's "upscale" feel gives it an edge as the economy improves while Wal-Mart's "discounter" reputation could hurt the company in the future. Or since Wal-Mart buys up such large chunks of inventory and secures better deals, it has that special appeal to consumers, allowing for better value.

Others may argue both companies are at risk of underperformance due to the fact food and staples retailing remains a stable business yet is fairly limited and driven by population growth -- relatively stagnant in recent years in the US.

All of these ideas are clearly arguable in their own right.

But here's my take: As the economy improves and people begin to rekindle that long lost feeling of having a few bucks in their pocket, they'll want to splurge a bit. It may sound silly, but stopping by the Target store and paying a few more dollars for a more upscale feeling isn't an unreasonable expectation. Personally, I enjoy much more the act of stepping into a Target store than a Wal-Mart store, though I'm certain many shoppers don't care about this and are just looking for the best deal.

After combing through both company financials and taking a broader context into view, I've learned a few things. Principally among these realizations is that both companies are poised to do well in the future and are a force to be reckoned with. I'm sticking with TGT due to their impressive history of raising dividends for the past 40 years plus and their commitment to ensuring their shareholders will see more significant raises in the future.

What's your take?

Disclosure: I am long TGT.