In this installment of Using the Value Line Report we will compare two contemporary icons of the retail consumer/household goods arena, discount retailer Wal-Mart Stores (WMT - Free Wal-Mart Stock Report) and retail building supply/home improvement chain Home Depot, Inc. (HD - Free Home Depot Stock Report). Both are high-profile companies in their respective industries that have enjoyed record operational advances in the challenging years since the most recent recession. In evaluating these businesses and comparing the price performances of their equities, we will highlight the compelling characteristics that may attract investors, as well as some of the cautionary factors that ought to be considered before committing funds to either of these issues.
The Value Line Page offers both the most-savvy investor, as well as the novice first-timer a wealth of data and analysis for conscientious portfolio decisions. With two high-quality equities such as these, equally compelling traits are to be expected, as they are esteemed Dow components. Common attributes notwithstanding, perusing each page soon reveals a number of distinctive factors that sets the two apart. Reading through the Analyst Commentary often provides insight into each company’s most attractive performance metrics.
Indeed, in regard to Wal-Mart, analyst Kevin Downing states “These shares are timely. The company is positioning itself to better compete in the e-commerce space.” Additionally, Mr. Downing notes that “Long-term price appreciation potential is decent when taking into account Wal-Mart’s top ranks for Safety, Stock Price Stability, Earnings Predictability, and Financial Strength.” These observations can be verified, respectively, in the Ranks and Financial Strength boxes and highlight to the stock’s relative price performance prospects for the year ahead, as well as the stability of Wal-Mart’s financials.
Meantime, of Home Depot, analyst Matthew Spencer says “we look for housing to remain a tailwind (despite a recent uptick in mortgage rates) thanks to favorable trends in home-price appreciation, housing turnover, household formation, and the aging of the U.S. housing stock. GDP growth ought to be supportive, as well, as should internal efforts to create a more formidable online presence, increase productivity, and court professional customers.” Here, Mr. Spencer calls attention to macroeconomic trends that ought to support revenue and profit growth over the longer term.
From the commentaries, it is apparent that there are positive drivers for both WMT and HD, alike. However, once applied in context to the data available in the Statistical Array and the illustrated price movement of each equity, which can be found in the Graph of each respective page, further scrutiny reveals that, while HD has delivered impressive capital gains over a multiyear span, the Timeliness rank of 4 suggests that the relative price performance of the shares will likely lag that of the broader market’s averages over the next six to 12 months. To wit, the P/E multiple, which resides in the Top Label, is somewhat elevated from historical levels. Consequently, the equity may be due for a round of profit-taking. On the other hand, WMT shares have exhibited some inconsistencies over the past few years. The Graph on this page paints a far less inspiring picture of relative stock-price performance. Although the issue has been achieving incremental gains and risen to record highs, the vector of the path taken has been somewhat more horizontal, when compared to the considerably more positive slope of HD’s price ascension. Moreover, a look at Wal-Mart’s Array and its Quarterly Revenues and Quarterly Earnings boxes shows that the company’s operations have struggled of late.
Nonetheless, these data sections also suggest that an operational recovery could be on the near-term horizon. This could also mean that the same is true for the stock price, as the P/E multiple here has been constrained for some time. To wit, as Mr. Downing mentioned, the Ranks box lists a Timeliness rank of 1 (Highest), which indicates that WMT shares are expected to outpace the broader market’s averages in the year ahead, thereby making WMT the more attractive play for short-term accounts.
Elsewhere on the page, a look at the Annual Rates boxes (located at the mid-left side of the page) of both companies reveals some interesting, yet somewhat perplexing, data when compared to the 3- to 5-year Projections box (at the top-left corner of the page). The Rates box illustrates both historical rates of growth for specific performance indicators, including Revenues, Cash Flow, Earnings, etc., as well as projected rates of growth over the next 3 to 5 years for those metrics. Meanwhile, the 3- to 5-year Projections box displays the Target Price Range, the appreciation potential, and the expected total returns of the equities over that span. Closer scrutiny of these data segments reveals that, while Home Depot has more attractive operational growth prospects over the next three to five years, Wal-Mart offers more compelling potential for capital gains and total returns. All things being equal, stronger revenue, cash flow, and earnings growth prospects typically point to more attractive capital gains over the long haul. However, it would appear that HD’s more impressive price performance of late has already discounted much of the revenue and earnings growth potential over the 3- to 5-year time horizon. In fact, this data suggests that, although Wal-Mart has been challenged for several quarters, the current quotation offers a more fruitful entry point for investors seeking long-term gains.
All told, given that both of these companies are well-established blue chips, risk is typically of less concern with these issues. This allows prospective investors to focus more intently on growth indicators, like revenue, cash flow, and earnings, as well as other catalysts that could boost stock price gains. In this instance, it is merely the distinction of timing and value that distinguishes the two stocks. Indeed, while both equities would be a welcome component to any well-balanced portfolio, it would appear that the keen investor may be best served by taking profits in Home Depot and bolstering positions in Wal-Mart at this particular juncture.