Defending Wal-Mart on CNBC (WMT, TGT, BRK/A)

Douglas A. McIntyre

As a guest on CNBC today (link to video), I found myself in an interesting position: coming to the defense of Wal-Mart (WMT-NYSE) shares.  This isn’t exactly a change of heart at all from all of the current problems at Wal-Mart, because this was as it pertains to Target (TGT-NYSE) and the future ahead as far as which is likely a better longer-term investment from here.  The main reason CNBC was covering this was because Warren Buffett of Berkshire Hathaway (BRK/A-NYSE) is more of a believer in Wal-Mart over Target. My longer-term stance is that from a “long-term value investor” standpoint, Wal-Mart offers what looks to be a better valuation and perhaps better downside protection. 

My position is almost all on relative values that basic value investors look at.  My belief really boils down to the following:

METRIC        Wal-Mart    Target
Forward P/E    15.0           16.5
Times Sales    0.57          0.83
4-Year Stock    FLAT        >100%

The honest truth, or at least my opinion of it, is that Target is a much better run franchise and it has a much better image.  It has higher operating margins, it is a better shopping experience, and management is hard to dog.  But since the economic recovery really started coming on in 2003 Target shares are up more than 100% and Wal-Mart has been a dud with close to a zero return.  Target has probably made its giant leapfrogging gains that were easy and now the relative gains will probably be harder to make.

Opposite of me was the esteemed Dana Telsey of  Telsey Advisory Group.  She is one of the star independent analysts out there for retail stores and trends.  She and I actually see what looks to be the same inside each company as of today.  Our difference is how investors will make out on a long-term basis.  Only time will tell the verdict on this.

Wal-Mart needs to decide to stop using some loss leader in Q4 and it can already give up a fraction on this price crushing to the point that margins are dead.  It will be a slower grower ahead and it obviously has image issue that it has to overcome.  If the board of directors there does not recognize this and if the board does recognize that a friendlier face for a Lee Scott replacement then I would come out calling for FAR MORE than just “core leadership.”  I have maintained since December that Lee Scott needs to go.

As far as downside or any economic troubles, Wal-Mart is also probably a better spot to be for defensive and value-oriented.  The fact that many Wal-Mart customers ARE Wal-Mart customers is more of a price sensitivity issue.  If the economy goes through a real downturn of size and for a longer-than expected time, there will just be more shoppers that HAVE to go back to Wal-Mart for more of their needs.

This isn’t exactly a ringing endorsement for growth or momentum investors, but for longer-term value players Wal-Mart may be a better spot.  Sometimes personal opinions and feelings and preferences can get in the way of investing for gains. Business is Business.

Jon C. Ogg
May 7, 2007

Jon Ogg can be reached at; he does not own securities in any of the companies he covers.