If you don't know Walmart's WMT recent history then read my article on Walmart WMT and Coke KO from last year. There are a lot of theories about Walmart vs. Target and the stocks performance. They stem from WMT being overvalued to just being mis-managed compared to Target TGT.

Walmart (WMT)
One of the first things I see with Walmart and like is that they grow free cash flow consistently. This is important because they pay a dividend and will probably continue to boost that dividend payout.

Unless they can open stores on the moon there aren't that many places left for them to open up stores. Everybody likes China but the fact is Walmart stores in China are very different from stores in the US. Does that mean they won't be successful in China? They probably will be because after all they are a big company and can throw their weight around.

Walmart Earnings Analysis
I can say very confidently that Walmart will not be able to grow earnings per share (EPS) more than 20% per year over the next 10 years plus. The company and analysts expect them to grow earnings at about 10% a year. I'll be just a tad bit conservative and assume Walmart earns $3.46 for fiscal 09. I'll then assume 10% growth in earnings for a few years going forward. No more than five years.

Predicting earnings farther than 5 to 10 years makes business since but this is the stock market we are talking about with WMT. The market doesn't make sense for long and in my opinion your only fooling yourself if you think you can predict a single companies business fundamentals many, many decades into the future. Changing competition, economic externalities and just the nature of how businesses evolve can crush your hopes and simplest projections for a company. Remember, Kmart was the first big box discount retailer. Walmart just followed in their footsteps. What happened to Kmart in the early 2000s? They went bankrupt! Shortly after this I recognized the brand value in Kmart when the shares were still trading on the NYSE and made my first ever stock investment. What a genius call. Well, sort of. I was right and the company did live on and they emerged out of bankruptcy very well off and issued new shares on the Nasdaq. In just months Kmart on the Nasdaq went on to be a mega multi-bagger at least over 400%. Then Eddie Lampert bought them. Whoops. I had the worthless bankrupt shares on the NYSE. So, the lesson is contrarian investing works and predicting to many years in the future doesn't. Back to WMT.

What I can guess is that Walmart will earn $5.07 per share in 2013 by growing EPS just 10% a year. If the stock trades for a rough fair value "or its growth rate" it will trade for 10 times those 2013 earnings or for about $50 a share in 2013.

You say, "Well, holy crap Mark that's less than what the stock trades for today at $55! Walmart doesn't seem very cheap today. It would have been a better pick-up at $43."

But this is assuming investor sentiment in Walmart is low in 2013. Remember, this is the stock market and it could trade for any valuation investors are willing to buy it for. In fact, chances are there will be smaller, sexier companies growing earnings much faster than Walmart 5 years from now and the so called "smart money" will be chasing those companies. Walmart could get left behind. But, If we are in a bull market and every Joe in America is speculating in the market Walmart could very easily sport a 15 or 20 price to earnings (PE) multiple.

So, if we buy Walmart today at $55 and sell at a PE of 15 then for $75 a share in 2013 we will get a return of 38% on our money. This is a compounded annual return of 8% a year. If Walmart trades for 20 times earnings we get a 84% return, 16% a year compounded. Based on these figures, buying the stock today in my opinion leaves to much to the future valuations of the company. Buying the stock way below $40 looks like a better idea because there are investments that can give you better returns than Walmart in the $50s.

Target TGT Earnings Analysis
Target is pretty much the same story. Target is a little smaller than Walmart and it is likely that they will be able to grow EPS faster. If we assume conservatively they can grow EPS 11% a year they will have EPS of $5.01 in 2013. $5.01 in 2013 times 11 is $55. So Target is already looking like a better deal today at $40 a share. At 15 times earnings in 2013 there is an 88% return if bought today. 20 times earnings 100% return.

Target's inventory turnover ratio is pretty consistent at 6 which is pretty good. Walmart is doing even better getting items off the shelves faster with inventory turnover rising over the years up to 8 now. Inventory turnover was one of my main quantitative points when I compared Best Buy vs. Circuit City last year. Boy was I right there to buy Best Buy and short Circuit City from October through December in that pairs trade.



Nice return there for 3 months, especially in the CC short. Target vs. Walmart is a lot different though in terms of any advantages between the two companies.

Walmart may turn its inventory over faster bringing in faster profits but the two companies carry a lot of different inventory. Target has slightly different offerings as far as licensed clothes and home products. I think Walmarts merchandise might appeal more to a penny-pinching family in a recession. After all they have branded themselves very well as "low prices." They also own Sam's club another discount store.

Bottom line. I think Walmart will perform better in the recession but the contrarian in me doesn't think it is a good idea to short Target. Neither companies are that attractive at these prices.

full disclosure: no position in WMT, TGT, BBY, CC