Is Wal-Mart a Good Stock to Buy?

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The #1 place on that list belonged to Dollar General Corp. (NYSE:DG), and Dollar Tree, Inc. (NASDAQ:DLTR) is another popular dollar store. Dollar stores were hot investments at one point, though each of these companies has underperformed the S&P 500 in the last year. Beta statistics are even lower here than at Wal-Mart, in the 0.1-0.2 range. There is a very small premium in terms of earnings, with both Dollar and General trading at 14 times consensus earnings for the January 2014 fiscal year. Bottom-line growth last quarter was over 20% in each case, with Dollar General seeing a double-digit growth rate in revenue as well. We think the dollar stores are still intriguing stocks, and would certainly be undervalued if they can continue their high growth- that might be challenging, however, and would be the core of any research on these companies.

Of course, Wal-Mart is traditionally compared to Target Corporation (NYSE:TGT) and to Costco Wholesale Corporation (NASDAQ:COST). Target is priced about even with its larger peer, with essentially identical trailing and forward earnings multiples. Target did experience a slightly larger earnings growth rate in its most recent fiscal quarter versus a year earlier than Wal-Mart did, and as a smaller company its growth may be more sustainable; we think that investors would be well served to consider both companies. Costco’s growth numbers have been even better, with revenue up 10% and net income up 30% from their levels in the same period in 2011. Even at a trailing P/E of 25 it might be worth looking at as a growth stock.

Frankly, we think that a number of retail stocks have value potential. Target and Wal-Mart look like outright value plays as long as they can deliver some growth. The dollar stores are only slightly more expensive and have been doing well recently. Costco is the only stock we’ve covered here with earnings multiples above 20, and that company has recorded strong improvements in its net income.

Disclosure: I own no shares in any stocks mentioned in this article.

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