Warren Buffett’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) owns more than 12.9 million shares of Walmart Stores (WMT, Financial), a position that is less than 1% of overall assets under management and could be be dead money that would be better served in Target (TGT, Financial) at these levels.
It would be pretty naive to think that Walmart has an economic moat, but Target doesn’t. Here’s a brief comparison from a purely numbers point of view.
Gross margins are 430 basis points (4.3%) higher at Target compared to Walmart to accompany a 50% larger operating margin. Sure Walmart has a lot more annual revenue and produces more net income, but Target actually produces more cash per share and needs far less capital spending, percentagewise, at just 42% of net income compared to 74% at Walmart. Both companies pay out about the same ratio of earnings as dividends. Target is yielding a little bit more at ~3.74% right now because over the last six months its stock is off 15%.
Target’s financials are impeccable with a strong history of sales and profit growth tacked onto the 274 million shares (31%) the company has bought back over the last decade.
From a business perspective, Walmart operates on razor-thin margins, choosing to bring in customers at scale to generate profit. Walmart employs over 2.3 million people yet only generates $6,286.95 in profit per employee. Raise those wages to $15 per hour, and they’ll have to cut elsewhere to make up the difference. Target, on the other hand, employs 341,000 and generates $9,812.32 in profit per employee. Both seem to pay about the same, with Target paying slightly more for its managers. This is why better gross margins are crucial to long-term business survival and success.
This doesn’t even take into consideration the number of retail stores Walmart has versus Target. Target operated 1,792 stores at the beginning of last year while Walmart had 11,527. Finally, Walmart generates $1.25 million in profit on $42 million per store while Target produces $1.87 million in net income on $39.3 million per store.
The only stat that I’ll concede to Walmart is that management in Bentonville, Arkansas, has done a better job growing book value than management in Minneapolis. Other than that, Target is the clear winner both in store experience and financially. Long term, both Target and Walmart will survive retail shifts due mainly to the size and cash pile. Each will continue to influence local municipalities to cut deals. More importantly, though, Target is the better buy.
In the last year, cash flow has picked up and will continue to allow the company to take even more shares off the table. Excess capital has been used to pay down debt levels. This trend will continue, even if it progresses at a more modest pace. All in all, if Target adds another $1.5 to $2 to its EPS number in the next three to five years, I expect the stock to rise above $100 per share. In the meantime, getting close to 4% to own it isn’t bad, either.
Warren, if you’re reading, Target’s a good buy, too.
Disclosure: I am not long/short any of the stocks mentioned in this article.
Start a free seven-day trial of Premium Membership to GuruFocus.
