In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.
Today's matchup is a retail battle involving the king of discounting Wal-Mart (NYSE: WMT); the trendier, more upscale Target (NYSE: TGT); and the premier online marketplace, Amazon.com (Nasdaq: AMZN).
By using five short-of-scientific-but-carefully-chosen criteria, let's determine which of these three plays is the best buy (assuming we have to buy one).
Round 1: Balance sheet
Target and Wal-Mart are both reasonably leveraged, with debt sitting at 53.8% and 43.8% of capital. Each easily covers its interest payments. Meanwhile, Amazon has a fortress-like balance sheet, with more cash than debt. We can debate about the optimum capital structure. Especially in this low-interest-rate environment, a bit of debt can be an efficient move. I think each company has a reasonable balance sheet for its purposes. However, for this round, we'll give the nod to the company with the least debt. Rank: (1) Amazon, (2) Wal-Mart, (3) Target.
Round 2: Operations
While we dinged the bricks-and-mortar companies for their debt in the first round, it'll help them here, as the debt boosts their returns on equity. Here, Wal-Mart wins with a 23.2% ROE. Amazon brings up the rear with a still-good 15.2% ROE. Amazon also has the lowest gross margins of the three. Rank: (1) Wal-Mart, (2) Target, (3) Amazon.
Round 3: Sexiest bet
Amazon has to be the sexiest here. It's trying to disrupt the physical shopping experience of the other two as well as more specialized retailers including Best Buy (NYSE: BBY), Radio Shack (NYSE: RSH), and Staples (Nasdaq: SPLS). Add to that its Kindle e-reader, its Fire tablet offerings, and its cloud-computing kicker, and you've got a lot of potential growth.
Wal-Mart can claim international growth prospects, but it's hard to compete with Target's X factor, especially coming off its buzzworthy Missoni designer-clothing promotion.
Rank: (1) Amazon, (2) Target, (3) Wal-Mart.
Round 4: Safest bet
What Wal-Mart loses in sex appeal, it gains in safety. Not only is it trading at the lowest price multiples, but it's also the largest of these three companies and still puts fear into the hearts of Mom-and-Pop shops around the globe. Target's not priced far above Wal-Mart in the low-single-digit P/E-ratio range, but Amazon trades for more than 100 times trailing earnings and 74 times forward earnings. That's quite a growth premium, especially considering fellow Internet retailer eBay (Nasdaq: EBAY) has a forward P/E ratio of 14. Of course, Amazon bulls will note that its free cash flow has been outstripping its earnings and that it's been plowing quite a bit into R&D. Others will also argue that given trends, it's safer to be a dominant online retailer than a dominant physical retailer. That said, our rank: (1) Wal-Mart, (2) Target, (3) Amazon.
Round 5: CAPS rating
Our Motley Fool CAPS community isn't especially excited about any of the three companies. Out of a maximum of five stars, Wal-Mart garners four while Amazon and Target get a middling three stars. Target beats Amazon when we look into the numerical rank. Rank: (1) Wal-Mart, (2) Target, (3) Amazon.
The summary rankings
|
Category |
Amazon |
Wal-Mart |
Target |
|---|---|---|---|
| Balance sheet | 1 | 2 | 3 |
| Operations | 3 | 1 | 2 |
| Sexiest bet | 1 | 3 | 2 |
| Safest bet | 3 | 1 | 2 |
| CAPS rating | 3 | 1 | 2 |
| Average finish | 2.2 | 1.6 | 2.2 |
There you have it. Interesting results. Wal-Mart finishes first, with Target and Amazon tied for second. If it's possible, I'm a fan of the business models of all three companies -- at least at the right price. What about you?
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