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Could Target Offer Better Upside Than Wal-Mart in 2018?
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Looking back at 2018, it would not be incorrect to characterize this year as the one in which brick and mortar retail faced its gravest challenges. Always a formidable online presence, Amazon.com, Inc. (AMZN - Free Report) fired its first offline salvo when it acquired Whole Foods for $13.7 billion. This was possibly a larger symbol of the changes sweeping through the entire brick and mortar retail space.
Even as stores shuttered and a swathe of mall closures ensued, industry occupants responded to new challenges through a variety of initiatives. What finally emerged was a new online-offline model, best illustrated by the efforts of Dollar Tree Inc. (DLTR - Free Report) , Wal-Mart Stores, Inc. (WMT - Free Report) and Target Corporation (TGT - Free Report) .
Wal-Mart's Resounding Success
Wal-Mart owes its huge success in 2017 to its recent and continuing efforts to strategically transform itself to face new challenges. The stock is up 43.6% year to date and shows no signs of slowing its ascent. The iconic retailer also reported stunning third-quarter fiscal 2018 results and raised its bottom-line view for fiscal 2018. Wal-Mart has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
So what exactly did the iconic discount retailer get right? After years of sluggish sales, Wal-Mart got its act together primarily through a two-pronged approach. Firstly, it has invested billions of dollars in technology in order to fortify its e-commerce presence.
It has also ramped up its delivery capabilities significantly and invested $2.7 billion in higher wages and training, initiatives which are paying rich dividends. (Read: What Can Target Learn From Wal-Mart's Retail Game?)
Target Gets its Act Together
Target also reported strong third-quarter results, but shares of the Minneapolis-based company declined 4% in pre-market trading on Nov 15. This was because the year-over-year decline in the bottom line and management’s comments about a highly competitive environment in the fourth quarter was not well received by investors.
But Target made several moves recently that have improved its prospects in a big way. Evidence of these efforts is the 25.1% price gain it has experienced over the last six months, significantly higher than the broader sector’s 15.1% increase over the same period.
Firstly, it has decided to introduce flexible format stores in order to increase its presence in densely populated urban locations. Also, it has significantly developed its online platform, aggressively reduced costs and started to showcase more premium products.
Recently, it strengthened its grocery delivery capabilities by acquiring grocery delivery company Shipt for $550 million. With Target already offering same-delivery in New York City, the Shipt purchase will only add to Target’s delivery muscle. (Read: Grocery Gunfight: Can Incumbents Fend Off Amazon?)
Could Target Have Better Upside Potential?
Wal-Mart’s superlative success is well known and it is likely that the stock will enjoy a similar run of gains going forward. But could Target offer investors better upside in the days ahead? A cursory glance at some valuation metrics seems to indicate that this might just be the case.
The price to sales ratio is particularly relevant in a consumer focused industry whose fortunes are dictated by the ebb and flow of sales. This ratio indicates the market value of each of the company’s sales dollars.
Coming to the two stocks under consideration, both are undervalued compared with the wider industry, which has a P/S ratio of 1.08. However, Wal-Mart is the pricier of the two, since it has a P/S ratio of 0.6, higher than Target’s reading of 0.51.
A more-or-less similar picture emerges when comparing EV/EBITDA ratios. This it is the ideal metric to compare two companies within the same industry. Further, it is not affected by the differing capital structures of the two companies.
Coming to the two retailers, both Wal-Mart and Target are undervalued relative to their broader sector. However, Target holds the edge here with an EV/EBITDA value of 6.57, lower than 9.71 for Wal-Mart.
In Conclusion
Wal-Mart’s multiple initiatives have stood the retailer in good stead through 2017 and are likely to help it move even higher next year. Target is yet to catch up, but could offer higher upside in the days ahead, a conclusion borne out by the comparison of more than one valuation metric.
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Could Target Offer Better Upside Than Wal-Mart in 2018?
Looking back at 2018, it would not be incorrect to characterize this year as the one in which brick and mortar retail faced its gravest challenges. Always a formidable online presence, Amazon.com, Inc. (AMZN - Free Report) fired its first offline salvo when it acquired Whole Foods for $13.7 billion. This was possibly a larger symbol of the changes sweeping through the entire brick and mortar retail space.
Even as stores shuttered and a swathe of mall closures ensued, industry occupants responded to new challenges through a variety of initiatives. What finally emerged was a new online-offline model, best illustrated by the efforts of Dollar Tree Inc. (DLTR - Free Report) , Wal-Mart Stores, Inc. (WMT - Free Report) and Target Corporation (TGT - Free Report) .
Wal-Mart's Resounding Success
Wal-Mart owes its huge success in 2017 to its recent and continuing efforts to strategically transform itself to face new challenges. The stock is up 43.6% year to date and shows no signs of slowing its ascent. The iconic retailer also reported stunning third-quarter fiscal 2018 results and raised its bottom-line view for fiscal 2018. Wal-Mart has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
So what exactly did the iconic discount retailer get right? After years of sluggish sales, Wal-Mart got its act together primarily through a two-pronged approach. Firstly, it has invested billions of dollars in technology in order to fortify its e-commerce presence.
It has also ramped up its delivery capabilities significantly and invested $2.7 billion in higher wages and training, initiatives which are paying rich dividends. (Read: What Can Target Learn From Wal-Mart's Retail Game?)
Target Gets its Act Together
Target also reported strong third-quarter results, but shares of the Minneapolis-based company declined 4% in pre-market trading on Nov 15. This was because the year-over-year decline in the bottom line and management’s comments about a highly competitive environment in the fourth quarter was not well received by investors.
But Target made several moves recently that have improved its prospects in a big way. Evidence of these efforts is the 25.1% price gain it has experienced over the last six months, significantly higher than the broader sector’s 15.1% increase over the same period.
Firstly, it has decided to introduce flexible format stores in order to increase its presence in densely populated urban locations. Also, it has significantly developed its online platform, aggressively reduced costs and started to showcase more premium products.
Recently, it strengthened its grocery delivery capabilities by acquiring grocery delivery company Shipt for $550 million. With Target already offering same-delivery in New York City, the Shipt purchase will only add to Target’s delivery muscle. (Read: Grocery Gunfight: Can Incumbents Fend Off Amazon?)
Could Target Have Better Upside Potential?
Wal-Mart’s superlative success is well known and it is likely that the stock will enjoy a similar run of gains going forward. But could Target offer investors better upside in the days ahead? A cursory glance at some valuation metrics seems to indicate that this might just be the case.
The price to sales ratio is particularly relevant in a consumer focused industry whose fortunes are dictated by the ebb and flow of sales. This ratio indicates the market value of each of the company’s sales dollars.
Coming to the two stocks under consideration, both are undervalued compared with the wider industry, which has a P/S ratio of 1.08. However, Wal-Mart is the pricier of the two, since it has a P/S ratio of 0.6, higher than Target’s reading of 0.51.
A more-or-less similar picture emerges when comparing EV/EBITDA ratios. This it is the ideal metric to compare two companies within the same industry. Further, it is not affected by the differing capital structures of the two companies.
Coming to the two retailers, both Wal-Mart and Target are undervalued relative to their broader sector. However, Target holds the edge here with an EV/EBITDA value of 6.57, lower than 9.71 for Wal-Mart.
In Conclusion
Wal-Mart’s multiple initiatives have stood the retailer in good stead through 2017 and are likely to help it move even higher next year. Target is yet to catch up, but could offer higher upside in the days ahead, a conclusion borne out by the comparison of more than one valuation metric.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>