In this installment of Using a Value Line Report we will compare two giants in the retail consumer goods arena, discount retailer Wal-Mart Stores (WMT - Free Wal-Mart Stock Report) and retail building supply/home improvement chain Home Depot, Inc. (HD - Free Home Depot Stock Report). These consumer goods behemoths are both high-profile companies that have weathered the sluggish economic recovery and generated solid revenue and earnings growth, despite challenging consumer confidence and spending conditions since the most recent recession and the related housing market collapse. In evaluating these businesses and their respective stock performances, we will highlight the compelling characteristics that may attract investors, as well as some of the less appealing factors that ought to be considered before committing funds to either of these issues.
The Value Line page provides a wealth of useful information to help everyone, from the most savvy investment mavens to the novice first-timers make conscientious portfolio decisions. With two high-quality equities such as these, it may be difficult to choose between them. Indeed, some of the traits common among Dow components, such as top-notch Safety ranks (located in the Ranks box), monster market caps (Capital Structure box), healthy dividend yields, and superlative Financial Strength scores (located in the Ratings box) mean that risk is typically of less concern with these issues. This allows prospective investors to focus more intently on growth indicators, like revenue, cash flow, and earnings, as well as other catalysts that could boost stock price gains.
Therefore, a look at the Annual Rates boxes (located at the mid-left side of the page) of both companies reveals some interesting and somewhat perplexing data. It would appear that, while Wal-Mart has exhibited more impressive historical growth rates, Home Depot has more attractive growth prospects over the next three to five years, assuming that the respective analysts’ financial estimates in the Statistical Array are close to the mark. All things being equal, stronger revenue, cash flow, and earnings growth prospects typically point to more attractive capital gains over the long haul. However, a closer look at the 3- to 5-year Projections in the top-left corner of the page shows that Wal-Mart boasts more appealing price appreciation potential out to late decade, than Home Depot.
Still, it is important to note that WMT’s more favorable long-term prospects are partly a result of weaker price performance over the past few months, as softer demand has hurt year-to-year operational comparisons for the discount retailer, while Home Depot’s firm top- and bottom-line showings have been spurred by the ongoing housing recovery. In fact, HD’s equity price hit a new 52-week high of $83.20 back in March and, though it has since retreated from that level, the stock has been edging closer to that peak of late. Thus, its P/E multiple (found in the Top Label) is several hundred basis points above historical levels. Conversely, Wal-Mart’s share-price declines have generated a lower P/E multiple, which suggests that WMT shares have some more room to run over the pull to 2017-2019. Even though the stock is ranked 4 (Below Average) for Timeliness, which means that its year-ahead price performance will likely trail the averages of the broader market, the financial estimates indicate that analyst Kevin Downing believes Wal-Mart’s earnings challenges should be short-lived. Thus, the aforementioned price dip could present a good entry point for those seeking long-term capital gains. Nevertheless, it is a tough choice between the two.
Perhaps another glance at the Ratings box could tip the scales, as Wal-Mart boasts supreme marks for Stock’s Price Stability and Earnings Predictability (100 out of 100 versus HD’s 90 and 80 out of 100, respectively). It also has a superior score for Price Growth Persistence (55 out of 100 to HD’s 45 out of 100). Moreover, we believe that Wal-Mart’s expansion strategy and cost-efficient business model offer more promise over the long haul. Indeed, we echo Mr. Downing’s sentiments in the Analyst Commentary, where he states “We like the small-format expansion strategy, and have confidence in Wal-Mart International’s ability to transition emerging markets to the everyday low price strategy”. Hence, it would appear that Wal-Mart has a slight edge over Home Depot when it comes to long-term price appreciation.
At the time that this article was written, the author held no positions in any of the companies mentioned.