Amazon Versus Wal-Mart: The War For Your Dollar

Wal-mart is a name we all know and most of us have probably shopped at one of their locations in The United States, Canada, Mexico, or another international location around the globe. Wal-mart operates under 69 different banners (names) in 27 different countries. Wal-mart employes a staggering 2.2 million people globally. What first brought my attention to Wal-mart was in the fall of 2011 I was shopping at a location and could not understand why so many people came to the same place to purchase goods and are willing to stand in line behind 25 other people and wait. Every register consistently ringing as you stand there and listen, if only it was partially yours.

I then went home researching company internals mainly the annual reports for the past 13 years going back to 1999. Wal-mart has increased annual cash dividend every year since 1974, an extremely impressive track record. I also looked at the value of the shares through many different metrics and ratios making sure I understood the fundamentals to the best of my ability. I first purchased shares at the cost of $57.60 and had planned on holding them, until recently. As macro head winds continued to cause investor panic and fear, Wal-mart continued to climb. I felt it was too far too fast and had reached my intrinsic value mid-range for 2012. While Europe had gotten worse and QE3 had been announced, I believed general markets were also due for a pull-back (also using technical analysis). I decided to raise capital when shares were trading at around $73.00, unfortunately missing the short-term top (and now 52-week high) of $77.60. After a brief pull-back and another earnings period I have decided to re-visit this company.

Some Valuation Metrics of Wal-mart: Current Share Price: $69.50

P/E Ratio: 14.6

Price to Sales: 0.5

Dividend Yield: 2.2%

Annual Dividend: $1.59 per share

E.P.S 10 year average growth rate: 11.7%

Operating Margin: 5.9%

Payout Ratio: 32%

B/V per share: 20.91

ROE: 23.5%

Debt to Equity: 0.63

Current Ratio: 0.82

Wal-mart is also targeting an organic business growth rate of 5%+ over the next 5 years, while increasing free cash flow per share substantially in most recent years. Through active buy-backs shareholder ownership will increase, higher dividend distribution, as well as “artificially” higher E.P.S.

Over the next 5 years if all goes well and Wal-mart continues to steal market share and while growing organically, we could see a P/E multiple expansion closer to a Coca-Cola or Pepsi valuation. Add in E.P.S growth, no margin decline, and share buy-backs and I would see the share price around the 95-105 range, 3-5 years from now. Wal-mart is continuing to grow the grocery segment of the business as well as the e-commerce department. They have rolled out various services in recent years, depending on your location and could possibly offer a lending service internationally in the future.

I wanted to compare Wal-mart with Amazon to show an extreme discrepancy in valuation with relatively close business models.

Amazon Share Price: $243.40

P/E Ratio: 2500.00

Price to Sales: 2.0

No Dividend

E.P.S 5 year average growth rate: 24.9%

Operating Margin: 0.94%

B/V per share: $16.67

ROE: 0.52%

Current Ratio: 1.04

Debt to Equity: 0.18

Although Amazon has been growing at astonishing rates, margins have been compressing continually and debt is expanding. I don’t believe Amazon fundamentals justify the price and have thought of pairing the two together as a pair trade and hedge. At the very least I expect AMZN to crack the $200 marker by early next year while seeing Wal-mart continue the journey upward. Wal-mart continues to target Amazon directly by offering price matches, a payment method of cash on delivery, and extreme focus/penetration in the e-commerce department. One thing to keep in mind is that CASH IS KING and Wal-mart certainly understand this concept.

 

Trade Idea = Long WMT, Short AMZN

(AMZN possibly through a “put butterfly spread” if expecting downside alone)

I have no positions mentioned above but my initiate a position in the next 72-hours.

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