Cross-sectional analysis for Walmart and its peers
Walmart (WMT) is trading at a forward price-to-earnings ratio, or PE, of 16.8x. It’s the lowest among its peer group. In the comps below, only the select 30-stock Dow Jones Industrial Average (DIA) is valued at less.
Costco (COST), Target (TGT), and Kroger (KR) are also pricier. They have valuations of 28.2x, 17x, and 20.2x, respectively. Walmart’s valuation also trails the overall industry. The S&P 500 Food & Staples Retail Index is trading at ~20% more. It’s trading at a PE of 20.2x.
In terms of the forward price-to-sales ratio, the valuations appear to be in-line. At a price-to-sales ratio of 0.6x, the valuations match the multiple of the S&P 500 Food & Staples Retail Index.
Cash is king
However, Walmart’s dividend and free cash flow yields—at 2.2% and 4.9%, respectively—are higher than the overall industry. Also, Walmart consistently generated free cash flow in excess of $10 billion over the past few years. Of course its scale is much larger than its peers. However, consistency is important to generate returns that are less volatile.
Stocks, like Kroger and Family Dollar Stores (FDO), have returns that outpaced Walmart over the past few years. They have lower dividend and free cash flow yields.
Considering the relatively low valuations versus its peers, these figures imply that Walmart could be generating even better cash flows—compared to its competitors. Alternatively, peer group valuations could be expensive. This doesn’t appear to be the case in regards to Kroger. In contrast, Costco is trading at a PE of 40% more than the overall industry. This could be excessive, considering that Costco is primarily a wholesaler. It earns lower overall margins than Walmart.
As we explained previously in this series, Walmart has been plagued by negative comps in key markets lately. Between January 2014 and January 2015, Walmart’s valuations increased. They were up by over 33% in terms of forward PE. Most of the upside came over the last three months. In 3Q15, the company reported positive comps for its US segment for the first time in several quarters. This benefited the stock price. The improving jobs market positively impacted sales.
In the next part of this series, we’ll discuss Walmart’s outlook.