by Austin Smith
This may be hard to believe for younger generations, but Wal-Mart (WMT) was not always the world's largest retailer. The company started out just like any other retailer. Wal-Mart has been on top of the retail industry for so long that it is hard to remember, at least for me, a time before that. As a stock, Wal-Mart is looked at as a stable, dividend-yielding investment. The beta for Wal-Mart is 0.43, making it half as volatile than the market, while the dividend yield is 2.70%, or $1.59 annually.
Over the past year the stock price has trended upward. This is another sign that the economy is slowly recovering as consumer confidence improves in regard to retail companies. With earnings of $4.52, Wal-Mart has a price-to-earnings ratio of 13.20, which is less than the industry average at 15.7. Some of Wal-Mart's more well-known competitors include Costco (COST), Target (TGT), and online retail giant Amazon.com (AMZN).
I will discuss Amazon first, since I think it is the most interesting company of the three. The stock has been up and down over the past 12 months, currently close to the price it was at a year ago. In a report by Motley Fool's Austin Smith (same name but no relation), Amazon is starting to beat out Wal-Mart in the low-income family demographic. The company is also beating out Target, but I think it is more interesting that Amazon is to be considered a legitimate rival to Wal-Mart.
Some of the reasons Amazon is able to gain some of this market is lower cost due to less overhead, as well as being able to avoid state tax with no physical presence. In many cases, people will still go to physical locations for the items that either can't be shipped or of immediate need. However, there are consumers who are starting to do a lot of their shopping through the Internet retailer. One market that Amazon is trying to get deeper into is smartphones. Although it currently does not carry the iPhone, it does have the Nokia Lumina 900 phones in stock, which is anticipated to be a hot item. If Amazon is able to work out a deal to sell smart phones, including the iPhone, then that will be one more market it will use to grow.
Similar to Wal-Mart, Costco's stock price has also been on an upward trend. This is due to the company's strategy to sell products with heavily discounted prices, something everyone is looking for in the current economy. One interesting thing Costco is doing that keeps bringing consumers back is offering affordable places to eat at its locations. Costco currently has a food court in all but six of the 592 warehouses the company operates. Although these are signs that the company is doing well, there are also some signs indicating otherwise. Costco recently released earnings indicating that same-store sales increased by 5%, but fell below the expected 5.7%. In addition, there have been complaints from customers against the stores in general. Some may think this is a general tradeoff for the steep discounts it offers consumers.
Target is also a stock that has seen an upward rise in its price. If the store continues to expand in California as planned, the company's growth should continue. Not only is Target planning on opening a store in Petaluma, but it also has plans to open several other locations in the densely populated San Francisco area. Target is also in the process of positive promotions, as the company partners with Recyclebank in support of Earth Day. Through the promotion, Target is distributing 1.5 million reusable bags on April 22 and is offering additional savings on sustainable products throughout the month. In my opinion, it is promotions like these that will cause some consumers to stray from their normal spending habits, even if for only a short time, to help a good cause. I believe that this type of promotion could really help the store in regard to short-term profits.
As for Wal-Mart, it is still a retail giant -- but for how long? If any of these competitors has the ability to overthrow Wal-Mart, I would say it is Amazon. However, even if Amazon does take the No. 1 spot as a retailer, Wal-Mart is not going to go away quietly. Looking at the stock by the numbers, the company has a lower-than-industry-average P/E ratio. This would either mean the company could be undervalued or that it's having problems that are scaring off investors. In the case of Wal-Mart, I believe it to be more of the former.
Over the past five years, Wal-Mart had a higher growth rate than Costco and Target. However, past performance does not always guarantee future earnings. Currently, in estimated five-year future growth rates, Wal-Mart at 10% is expected to trail both Target and Costco. While this sounds like a bad idea, it is important to know that a company the size of Wal-Mart can't expect to grow at the same rates of smaller competitors.
For a stable, dividend-yielding stock, I am bullish on Wal-Mart. I would not expect anything crazy with regard to over-the-top earnings or huge fluctuations in price. However, I do expect the stock to continue to rise in price to reach or exceed analysts' estimated mean price of $63.50.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.