On Tuesday, May 20, 2008, we’ll see earnings out of Target Corporation (NYSE: TGT) and we’ll get to see just how the "recessed" client base is as far as shopping on a relative basis. Since Wal-Mart Stores, Inc. (NYSE: WMT) has enjoyed such a nice run-up while its prior thorn in the side (Target) has suffered, we wanted to see which stock represents the better investor choice for growth and for value based on today’s expectations and past performance. We had to peg prices, so we used $54.75 for Target and $57.00 for Wal-Mart. Essentially, we are looking at this no different than a pairs trader would look at the companies.
As we noted on Wal-Mart, analysts were all under the company’s own guidance. On Target, analyst expectations have come down for this year and next year over the last 90 days. Based upon the current analyst targets ahead, so below are some figures to outline this.
Target trades at 15.7-times Jan-2009 fiscal EPS and 13.7-times Jan-2010 estimates. Wal-Mart simultaneously trades at 16.5-times Jan-2009 fiscal EPS and 14.9-times fiscal Jan-2010 estimates. So the next fiscal earnings growth expectations from Wall Street are 14.6% for Target and 10.4% for Wal-Mart.
We also wanted to look at forward revenue projection. At almost $226 Billion in market cap, Wal-Mart trades at 0.55-times Jan-2009 revenues and 0.51-times Jan-2010 revenues. With a $44.7 Billion market, Target trades at 0.65-times Jan-2009 revenues and 0.6-times Jan-2010 revenues. The reason for this discrepancy on higher revenue multiple at Target is fairly simple to interpret since it has higher growth and higher margins.
According to Capital IQ: Target’s gross and net income margin for this last year were 31.6% and 4.5% respectively; and Wal-Mart’s gross and net income margin for this last year were 24.4% and 3.4% respectively.
In knowing that Target stock has been down while Wal-Mart stock hasbeen rising, let’s look to see how have the two stocks performedcompared to each other? Wal-Mart shares are up 35% from their 52-weeklows, are up about 21% from the end of 2007, are up about 26% since theend of 2006. Wal-Mart shares are only only down about 3.4% from their52-week highs. Target shares are now up about 16% from their 52-weeklows, are up 9% from the end of 2007, are down close to 3% from the endof 2006. Target shares are down 21% from their 52-week highs.
On a same-store sale basis, Wal-Mart has been winning and we won’t haveTarget’s same-store sales forecast until next week with earnings.
The long and short of it is that Target still has better growthexpected on Wall Street, has underperformed Wal-Mart as a stock, andhas better valuations in most cases. This isn’t without caveats,because we are in a recession climate. If we go into a long andprotracted recession then Wal-Mart is going to be better positioned asthe low-cost provider. Target is either selling all of or part of itscredit card operations, and that could create some issues. If youwould like a direct comparison on this, this is the same logic that wasused when I was a guest on CNBCa year ago where you can watch and see that I favored Wal-Mart overTarget for long-term relative value investors. As you can tell, thisis now changing back to an attitude of 2006.
Pairs traders do not like getting in ahead of events, so it is unlikelythat pairs traders are going to pile in entirely ahead of the event.In fact, it would be senseless and irresponsible to pile into almostany pairs trade all at once. But on a relative value basis and usingthe theoretical market discounting mechanism where you try to priceevents in 6 months or more in advance, Target now looks like it hasbecome a better relative value since its stock is down so much at thetime that Wal-Mart’s stock is close to multi-year highs.
We’ll see how this all pans out in the coming months.
Jon C. Ogg
May 15, 2008