Buy, Hold or Sell: Target (TGT) vs. Walmart (WMT)

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US retail sales rebounded in April as consumers showed resilience. Strength in the retail market should bode well for retail giants Target (TGT) and Walmart (WMT). But should one buy, hold or sell these shares? Read more to find out.

The retail industry has shown remarkable resilience and stability despite macroeconomic headwinds. Factors such as subdued price levels, a strong labor market and wage growth have bolstered the purchasing power of consumers, thus benefiting retail companies and raising their share prices.

Retail giants Target Corporation (TGT) and Walmart Inc. (WMT) are among the largest retail companies in the US. However, after taking a close look at their fundamentals, I conclude that WMT might be an ideal buy, while investors might hope for a better entry point in TGT. The reasons that support this conclusion are explained throughout the article.

According to the latest data from the US Census Bureau, the US. general retail sales last month they were up 0.4% from March and 1.6% year-over-year. NRF Chief Economist Jack Kleinhenz added: “Buyers are being selective and price sensitive, but we continue to expect spending to see modest gains throughout the year.”

Increased Internet accessibility and government emphasis on digitization are poised to create attractive opportunities for retail investment in emerging markets.

While TGT is down 6.8% year to date, WMT has gained 3.3% over the same period. Also, TGT has decreased by 14.9% over the past year, but WMT has gained 16.2% over the same year. TGT closed its last trading session at $138.93 and WMT closed at $146.42.

Here are the reasons why I think WMT might be a better choice:

Recent financial results

During the fiscal first quarter ending April 29, 2023, TGT’s total revenues increased marginally year-over-year to $25.32 billion. Its selling, general and administrative expenses grew 5.5% over the prior-year quarter to $5.03 billion

Its operating income decreased 1.4% year-over-year to $1.33 billion. Additionally, its Adjusted EPS decreased 6.2% from the prior-year quarter to $2.05.

On the other hand, WMT’s total revenues increased 7.6% year-over-year to $152.3 billion in the fiscal first quarter ended April 30, 2023. Its operating income increased 17.3% over the fiscal quarter prior year to $6.24 billion. WMT Adjusted EPS grew 13.1% year-over-year to $1.47.

Analyst expectations

TGT revenue is expected to decline 1.1% year-over-year to $25.76 billion in the fiscal second quarter ending July 2023. However, WMT revenue is expected to increase 4.6% year-over-year year to $158.35 billion in the same quarter.

Additionally, revenue for both companies is expected to increase marginally and 3.2% year-over-year to $26.58 billion and $156.28 billion in the fiscal third quarter ending October 2023.

past performances

While TGT ebit and EBITDA have decreased at CAGR of 1.3% and 2.8% over the past three years, WMT’s EBIT and EBITDA have increased at CAGR of 3.7% and 5.4% over the same period.

Cost effectiveness

TGT’s last 12-month EBIT margin of 3.61% is less than WMT’s 4.09%. TGT’s 12-month leveraged FCF margin of negative 0.74% is less than WMT’s 3.38%. Additionally, TGT’s last 12-month cash from operations of $6.68 billion is less than WMT’s $32.23 billion.

Valuation

In terms of forward EV/Sales, TGT is currently trading at 0.74x, which is higher than WMT’s 0.72x. TGT’s forward Price/Book Value multiple of 5.00 is higher than WMT’s 4.82.

POWR Ratings

WMT has an overall rating of A, which equates to a Strong Buy on our POWR Ratings system. On the other hand, TGT has an overall rating of C, which translates to Neutral. POWR scores are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also rates each stock based on eight different categories. While TGT’s 24-month beta of 1.21 complements its D rating for Stability, WMT’s 24-month beta of 0.64 justifies its B rating for Stability.

Additionally, TGT has a C rating for Sentiment, in line with its mixed analyst estimates. On the other hand, WMT has an A rating for it, in line with its analysts’ optimistic estimates.

Among the 37 stocks rated A Grocery stores/large retailers industry, TGT is ranked #31 while WMT is ranked #7.

Beyond what we’ve said above, we’ve also rated both stocks for Value, Momentum, Sentiment, and Quality. Click here to see the TGT ratings. Access all WMT ratings here.

The winner

The US retail industry appears resilient in the face of uncertainties. Both companies operating in this sector are well positioned to capitalize on growing market opportunities.

However, as discussed above, increased expenses and decreased earnings could further influence TGT’s performance. So I think one could hope for a better entry point for TGT.

On the other hand, considering WMT’s outperformance year to date, impressive year-to-date gain, and higher closing price, WMT is a better buy here.

Our research shows that your chances of success increase when you invest in stocks with an overall Strong Buy or Buy rating. See all of the top-rated stocks in the Supermarket/Major Retail industry here.

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WMT shares were trading at $146.42 per share on Monday afternoon, an increase of $0.26 (+0.18%). Year-to-date, WMT has gained 4.08%, versus a 10.25% rise in the benchmark S&P 500 index over the same period.

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About the author: Kritika Sarmah

Her interest in risk instruments and her passion for writing made Kritika a financial analyst and journalist. She earned her Bachelor of Commerce and is currently pursuing the CFA program. With her fundamental approach, her goal is to help investors identify untapped investment opportunities.

Further…

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