Dueling Fools: Wal-Mart Bear Rebuttal

My fellow Fool Ryan Fuhrmann has correctly identified Wal-Mart's (NYSE:WMT) many strengths. The retailer does a remarkable job generating cash flow, and its low-cost structure and logistical capabilities provide efficiencies that rivals struggle to match. Moreover, the stock does appear cheap relative to its historical multiples and the stocks of its peers.

But couldn't he have said the same about Wal-Mart last year? Or two years ago? Or three years ago?

I would argue that Wal-Mart shares, despite their high intrinsic value, will continue to underperform the market as long as Wal-Mart spends cash flow on misguided expansion. With declining returns on invested capital and a dividend payout ratio of less than 25%, Wal-Mart's shareholders would realize more value if the company paid a higher dividend and opened fewer stores. Unfortunately for shareholders, the company's management seems unwilling to signal that the company may have reached a mature stage in its development.

In addition, Wal-Mart appears to be off its game in competing for customers. Its same-store sales growth rates have been falling, even while rivals Target (NYSE:TGT) and Costco (NASDAQ:COST) increase their own comps. This trend is hardly surprising. Other discounters have distinguished themselves from Wal-Mart by providing a more pleasant shopping experience, especially in higher-margin categories such as apparel. Wal-Mart's past efforts to improve marketing, advertising, and merchandising tactics have been poorly conceived and badly coordinated; there's no evidence that the company now has any new tricks up its sleeve to quickly reverse a weak record in selling higher-quality products.

In light of the challenges facing Wal-Mart, the stocks of rival retailers do not look unattractive, even when they trade at richer multiples than Wal-Mart's 16 times earnings. For example, Costco shares trade at a multiple of 24 times earnings, but its five-year sales growth rate is higher than Wal-Mart's. Target shares trade at 19 times earnings, but the company's return on equity has been increasing, while Wal-Mart's has been declining. The price of Home Depot's (NYSE:HD) shares have suffered for many of the same reasons that Wal-Mart's stock has declined, but shares of the home improvement retailer trade at an even deeper discount than Wal-Mart's stock: just 14 times earnings.

Wal-Mart's management will someday get out of the way of the company's share price, rewarding long-term shareholders, but that day continues to seem distant. In the meantime, investors seeking to outperform the market should consider the stocks of some of Wal-Mart's more dynamic rivals.

You're not done with the Duel yet! Go back and read the other arguments, then vote for the winner.

Wal-Mart and Home Depot are both Motley Fool Inside Value picks. Costco is a Stock Advisor selection. We'd love for you to be a larger part of the community; that's why both newsletters are available free for 30 days.

Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the shares of any of the companies mentioned above. The Fool has a disclosure policy.