Walmart or Target: An Extended Peer Group Comparison
A company can frequently be valued by comparing it to a peer group of companies. The advantage of performing a peer group comparison is that the constituent companies are normally fairly similar along their product/service lines, sizes, and operating structures. This approach assigns company “value” based on the notion that assets of similar dimensions should sell at similar prices and is known as the “method of comparables.”
The method of comparables involves taking a subject company’s P/E, P/B, P/S, P/CF or some other multiplier and then comparing it to the mean or median multiplier of a peer group to derive a relative value. This equilibrium multiplier can then be multiplied to the subject companies per share earnings, book value, sales or cash-flows to derive a fair-value estimate. The stock’s market price could then be compared against this fair value estimate to determine whether the position is under- or overvalued.
For the purpose of this article we are going to use the method of comparables to assess Wal-Mart (WMT, Financial) and Target (TGT, Financial), the U.S.’ largest general consumer product retailers. The valuation metric we will use is the trailing 12-month P/E. We will evaluate the P/E using the mean P/E for their peer group companies as the benchmark value. Trailing P/Es for their peer group are presented in the table below.
Table 1: Trailing P/Es of Wal-Mart, Target and Peer Group
| Company | Trailing P/E |
| Wal-Mart (WMT, Financial) | 15.6 |
| Target (TGT, Financial) | 26.2 |
| Dollar General Corp (DG, Financial) | 19.4 |
| Canadian Tire (CTC.A, Financial) | 25.6 |
| Dollar Tree Stores Inc. (DLTR, Financial) | 19.6 |
| Dollarama Inc. (DOL, Financial) | 24.5 |
| Family Dollar Stores Inc. (FDO, Financial) | 25.6 |
| Costco Wholesale Corp (COST, Financial) | 28.1 |
| Big Lots (BIG, Financial) | 27.5 |
| Mean | 23.6 |
From the table above it is clear that the mean trailing P/E for the group is 23.6 and, as such, 23.6 represents the benchmark value for the multiple.
Assuming no differences in the fundamentals among peer group companies, it is possible to determine whether WMT or TGT are relatively fairly valued, relatively overvalued, or relatively undervalued by comparing their market multiples to the benchmark value. TGT appears to be overvalued because its P/E of 26.2 is greater than the mean of 23.6.
Based on the data in the table it is clear the WMT appears to be relatively undervalued. In fact, with a P/E 15.6 against a benchmark value of 23.6, it appears to be the most undervalued of all peer group companies.
Before drawing any solid conclusions, however, further analysis should be conducted to confirm whether the apparent differences in valuation can be explained by differences in other fundamental factors, such as differences in risk and expected growth rates. For instance, if Wal-Mart has a lower than average expected earnings growth, a lower P/E for Wal-Mart than the benchmark might be warranted. Also, if Wal-Mart has higher than average risk, a lower P/E would also be warranted.
One method of assessing differences in earnings growth on company multiples is to assess differences in PEG ratios (P/E-to-growth ratios). This ratio reflects the company’s P/E per unit of growth. Stocks with lower PEG ratios are typically better buys than stocks with higher PEG ratios. Of course, PEG ratios alone do not account for risk nor do they account for differences in the duration of growth (short-term or long-term).
Continuing with the valuation above, we have assembled data on company fundamentals related to risk (as measured by the companies’ Betas) and growth (as measured by the firms’ sustainable growth rates). We then calculate trailing PEG ratios by dividing trailing P/Es by sustainable growth rates.
Table 2: Valuation Data for Peer Group Companies
| Company | Trailing P/E | Sustainable Growth Rate | Trailing PEG | Beta |
| Wal-Mart (WMT, Financial) | 15.6 | 12.9% | 1.2 | 0.45 |
| Target (TGT, Financial) | 26.2 | 8.4% | 3.1 | 0.53 |
| Dollar General Corp (DG, Financial) | 19.4 | 19.0% | 1.0 | 0.31 |
| Canadian Tire (CTC.A, Financial) | 25.6 | 8.8% | 2.9 | 0.46 |
| Dollar Tree Stores Inc. (DLTR, Financial) | 19.6 | 35.0% | 0.6 | 0.29 |
| Dollarama Inc. (DOL, Financial) | 24.5 | 22.6% | 1.1 | 0.15 |
| Family Dollar Stores Inc. (FDO, Financial) | 25.6 | 22.5% | 1.1 | 0.30 |
| Costco Wholesale Corp (COST, Financial) | 28.1 | 13.5% | 2.1 | 0.54 |
| Big Lots (BIG, Financial) | 27.5 | 15.0% | 1.8 | 0.95 |
| Mean | 23.6 | 17.5% | 1.7 | 0.44 |
In Table 1, WMT was identified as relatively undervalued with its peer group companies and TGT was identified as relatively overvalued. Incorporating information in Table 2 on profitability growth and risk, we can more clearly see whether the companies are truly undervalued/overvalued.
WMT has a sustainable growth rate of 12.9%, a PEG ratio of 1.2 against a benchmark PEG ratio for the peer group of 1.7, and a Beta of 0.45—suggesting the same level of risk as its peers overall. As such, WMT does appear to be undervalued on a relative basis.
TGT has a sustainable growth rate of 8.4%, a PEG ratio of 3.1 against a benchmark PEG ratio for the peer group of 1.7, and a Beta of 0.53—suggesting a higher level of risk than its peers overall. As such, TGT does appear to be overvalued on a relative basis, confirming our initial hunch in Table 1.
Conclusion
In applying this method of comparables, we attempted to judge whether either of the U.S.’ two largest general consumer retailers represented a good buying opportunity. Of course, financial analysis, free cash-flow analysis, and a technical evaluation should be conducted in addition to what we’ve done here before drawing any hard conclusions. However, from this exercise it is at least possible to say confidently that WMT deserves a deep look and that it is now much more evident why WMT has been on Warren Buffet’s radar screen.
