My fellow Fool Ryan Fuhrmann has correctly identified Wal-Mart's
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
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
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.
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.