The economic crisis hit the general economy and the recovery has taken awhile to get around to certain sectors like housing (Lowe's shoppers) and bargain retailers (Wal-Mart customers). Both of these stalwart companies have had to contend with fierce competition from smaller companies like Dollar General and larger ones like Home Depot. This challenging outlook could spell opportunity for investors who can afford to wait for Wal-Mart and Lowe's to show their quality.
Let's examine some key metrics to see if either of these looks like a compelling bargain today.
On a P/E basis, Wal-Mart looks cheap at a double-digit percentage discount to the S&P 500's 19 P/E and it is cheaper than Lowe's as well. However, on a price to free cash flow basis, Lowe's is the cheaper stock today. Either way, these companies are not priced for perfection, which means investors can get in at fair prices.
Turning from price to quality, we can see two things about these businesses. One, they are lower margin. You can think of this as a negative indicator, but as Jeff Bezos once said, "your margin is my opportunity." But if there's a razor thin margin to begin with, there's less for Amazon to go after. Lowe's and Wal-Mart maintain consistent, low profit margins.
On the flip side, while they may not have fat profit margins, both companies generate good returns on equity. Lowe's in particular is showing a widening profit margin and an elevated ROE.
Both companies show commitment to their shareholders through dividend growth and share repurchases that shrink their share counts.
Wal-Mart and Lowe's both exhibit high quality, shareholder-friendly operations. Which one should an investor choose? The answer may have less to do with the companies themselves and more to do with the investor who is doing the choosing. Is the investor looking for growth or defense?
Lowe's represents a moderate growth story with improving quality metrics and margins, but to get those you must pay a slight premium to the P/E of the overall market. The Wal-Mart case is a defensive one, as the investor pays little for growth (below market price with Wal-Mart at a 16 P/E) and yet still gets to own a slice of a slow growing, high-quality company.
Gunnar Peterson has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Home Depot. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.