November 29, 2022

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Which Mega-Cap Retailer is a Better Buy?

Concerns over the possibility of the Fed’s aggressive interest rate hike to control the surging inflation have led to a broad-based sell-off over the past few weeks. Amid the uncertainties surrounding the market, mega-cap retailers Walmart (WMT) and Home Depot (HD) should be able to deliver stable returns because of their pricing power, significant market reach, and strong liquidity position. But which of these stocks is a better buy now? Read more to find out.



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Surging inflation and the Fed’s hawkish stance to bring prices down increase the chances of the economy slipping into recession. A decline in GDP in the first quarter also concerns investors. Amid this uncertainty, mega-cap retailers with expanded reach, solid pricing power, and high liquidity are expected to perform steadily. So, both WMT and HD should stay afloat. 

Walmart Inc. (WMT) and Home Depot, Inc. (HD) are two prominent players in the retail industry. With a market cap of $415.42 billion, WMT operates retail, wholesale, supermarkets, other units, and e-commerce websites worldwide. The company operates through Walmart U.S.; Walmart International; and Sam’s Club. It also offers fuel and financial services and related products. HD operates as a home improvement retailer that sells various building materials, home improvement products, decor products, and lawn and garden products and provides installation, tool and equipment rental, and home maintenance services. It sells its products through brick-and-mortar stores and online and serves do-it-yourself and professional customers. It has a market capitalization of $299.18 billion.

While HD lost 31% year-to-date, WMT gained 2%. Which of these stocks is a better pick now? Let’s find out.

Latest Developments

On March 7, 2022, WMT and Space NK, a British retailer of personal care and beauty products, announced a collaboration called BEAUTYSPACENK to bring prestige beauty products to Walmart.com and Walmart stores nationwide this summer. The collaboration leverages WMT’s size and scales with Space NK’s assortment of high-quality beauty brands and products. By offering a wide variety of price points across skincare, makeup, haircare and bath, and body, WMT should witness high demand for Space NK in the coming months.

On May 3, 2022, HD announced Home Depot Ventures, a $150 million venture capital fund created to identify, fund, and partner with early-stage companies to accelerate emerging technologies that aim to improve the customer experience. This advances HD’s ability to provide a seamless interconnected shopping experience and develop new and differentiated capabilities.

Recent Financial Results

WMT’s total revenues for its fiscal year 2022 fourth quarter ended January 31, 2022, increased marginally from the prior-year period to $152.87 billion. The company’s adjusted operating income came in at $6 billion, indicating a 5.9% rise from the year-ago period. WMT’s consolidated net income came in at $3.63 billion, compared to a $2.01 billion net loss in the prior-year period. Its adjusted EPS increased 10.1% year-over-year to $1.53. The company had $14.76 billion in cash and cash equivalents as of January 31, 2022.

For its fiscal 2021 fourth quarter ended January 30, 2022, HD’s net sales increased 10.7% year-over-year to $35.72 billion. The company’s gross profit came in at $11.86 billion, up 9.5% from the year-ago period. Its operating income came in at $4.83 billion for the quarter, indicating an 18.2% year-over-year improvement. HD’s net earnings came in at $3.35 billion, representing a 17.3% rise from the prior-year period. Its EPS came in at $3.21, indicating a 21.1% year-over-year improvement. As of January 30, 2022, the company had $2.34 billion in cash and cash equivalents.

Past and Expected Financial Performance

Over the past three years, WMT’s net income and EPS have increased at CAGRs of 27% and 29.2%, respectively.

WMT’s EPS is expected to increase 4.6% year-over-year in fiscal 2023, ending January 31, 2023, and 7.5% in fiscal 2024. Its revenue is expected to grow 3.2% in fiscal 2023 and 3.3% in fiscal 2024. Analysts expect the company’s EPS to grow at a 9.5% rate per annum over the next five years.

HD’s net income and EPS have increased at CAGRs of 13.9% and 16.9%, respectively, over the past three years.

Analysts expect HD’s EPS to grow 3.7% year-over-year in fiscal 2022, ending January 31, 2023, and 7.3% in fiscal 2023. Its revenue is expected to rise 1.7% year-over-year in fiscal 2022 and 3.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 14.6% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, HD is currently trading at 2.24x, 183.5% higher than WMT’s 0.79x. In terms of forward EV/EBITDA, WMT’s 12.19x compares with HD’s 13.19x.

Profitability

WMT’s trailing-12-month revenue is almost 3.8 times HD’s. However, HD is more profitable, with a 33.6% gross profit margin versus WMT’s 25.1%.

Furthermore, HD’s EBITDA margin, ROA, and ROTC of 6.4%, 6.5%, and 10.8% compare with WMT’s 17.3%, 20.5% and 31.9%, respectively.

POWR Ratings

While WMT has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, HD has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both WMT and HD have a B grade for Quality, consistent with their higher-than-industry profitability ratios. HD’s 31.9% trailing-12-month return on total capital (ROTC) is 320.7% higher than the 7.6% industry average. WMT has a 10.8% trailing-12-month ROTC, 65% lower than the 6.5% industry average.

WMT has been graded a B for Stability, which is in sync with its lower volatility compared to the broader market. WMT has a 0.55 beta. HD’s C grade for Stability is consistent with its higher volatility. HD has a 1.04 beta.

Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #7.

HD is ranked #23 of 63 stocks in the C-rated Home Improvement & Goods industry.

Beyond what we have stated above, our POWR Rating system has graded HD and WMT for Sentiment, Growth, Value, and Momentum. Get all HD ratings here. Also, click here to see the additional POWR Ratings for WMT.

The Winner

Amid the current uncertainties surrounding the stock market, mega-cap retailers WMT and HD should be able to deliver stable returns because of their broad market reach and other advantages over the smaller industry participants. However, HD, a consumer-cyclical stock, could suffer if the economy slows down further. So, the relatively cheaper stock WMT, which belongs to the consumer defensive sector, could be a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry, and here for those in the Home Improvement & Goods industry.


WMT shares were unchanged in after-hours trading Thursday. Year-to-date, WMT has gained 2.69%, versus a -17.14% rise in the benchmark S&P 500 index during the same period.


About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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