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The Undisputed Retail Champion: Wal-Mart Stores, Inc. (WMT), Target Corporation (TGT), Costco Wholesale Corporation (COST)

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The American multinational retail corporation Wal-Mart Stores, Inc. (NYSE:WMT) is the world’s third largest public corporation, the biggest retailer in the world, and the largest private employer in the world with more than two million employees.

Wal-Mart’s Earnings

On Feb. 21, Wal-Mart released its earnings for 4Q 2013. The company’s fourth quarter earnings grew to $5.61 billion, or $1.67 per share, from $5.16 billion, or $1.50 per share, a year before. Analysts had expected Wal-Mart to earn around $1.57 per share. As a result, company’s shares saw a 4 month high on Thursday. The company also increased its annual dividend by 18% to $1.88 per share.

A lower than expected effective tax rate of 27.7% was the main reason behind this surge. Same store sales were up 1% as opposed to Wal-Mart’s expectations of 3%. In food, health & wellness, toys & entertainment, the company gained a significant market share as net sales for the group grew 2.6% to $64.7 billion. Across all groups, revenue increased 3.9% to $127.1 billion.

Forecast for Fiscal year 2014

Wal-Mart Stores, Inc. (NYSE:WMT) didn’t have a great start to its new fiscal year since the delays in income tax refunds had a significant effect on personal disposable incomes. Therefore, the company expects the same store sales to remain flat in the next quarter. For the first quarter, Wal-Mart expects earnings per share of $1.18 on revenues of $117.5 billion. As far as the full year is concerned, analysts expect Wal-Mart to earn $5.37 per share on revenues of $496.21 billion.

Valuation

Wal-Mart is currently trading at a forward P/E (1yr) of 13.08x and has a dividend yield of 2.3%. It has a healthy PEG of 1.52 and a growth rate of 9.5%. Incorporating its dividend yield into its PEG gives us a strong PEGY of 1.22. Using an industry forward P/E of 15.43x, I would value Wal-Mart as follows:

Using consensus estimates, Wal-Mart’s value comes out to be $82.86, depicting the fact that it’s a hugely undervalued stock. Wal-Mart’s currently trading at $70.27; hence, it has an upside potential of almost 18%. Adding a dividend yield of 2.30% in this gives us a total return of more than 20%, making it one of the top buys in the retail sector.

Competitors

Wal-Mart’s close rival, Target Corporation (NYSE:TGT), is trading at a forward P/E (1yr) of 13.15x and has a dividend yield of 2.30%. It has a strong PEG of 1.22 and a PEGY of 1.02. A mean recommendation of 2.1 on the sell depicts that Target is one of the top buys in the industry. Using earnings multiples, I value Target at $74.37. At the moment, Target Corporation (NYSE:TGT) is trading around $63, so it has an upside potential of almost 17%, making it a must buy. You can have a further look at my detailed take on Target here.

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