Walmart or Amazon: An Extended Peer Group Comparison
- By Daniel Seens
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."
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The intrinsic value of WMT
The method of comparables involves taking a subject company's price-earnings, price-book, price-sales, price-free cash flow, 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.
Here we will use the method of comparables to assess Walmart (WMT) and Amazon (AMZN), two of the world's largest general consumer product retailers. The valuation metric we will use is the forward and trailing 12-month price-earnings ratio. We will evaluate the price-earnings ratio using the mean price-earnings ratio for their peer group as the benchmark value. Forward and trailing price-earnings ratios for their peer group are presented in the table below.
Table 1: Forward and trailing P/Es of Walmart, Amazon and peer group
Company | Ticker | PE Ratio | Forward PE Ratio |
Alibaba Group Holding Ltd | BABA | 43.5 | 24.3 |
Amazon.com Inc | AMZN | 141.7 | 62.5 |
Best Buy Co Inc | BBY | 20.3 | 13.1 |
Big Lots Inc | BIG | 11.1 | 8.8 |
Canadian Tire Corp Ltd | CTC.A | 23.2 | 11.3 |
Costco Wholesale Corp | COST | 32.0 | 29.3 |
Dollar General Corp | DG | 16.3 | 15.6 |
Dollar Tree Inc | DLTR | 11.3 | 13.3 |
Dollarama Inc | DOL | 24.0 | 17.5 |
eBay Inc | EBAY | - | 12.1 |
Pricesmart Inc | PSMT | 30.9 | 0.0 |
Target Corp | TGT | 14.8 | 15.0 |
Walmart Inc | WMT | 54.5 | 20.0 |
Average | 35.3 | 18.7 |
From the table above it is clear that the mean forward and trailing price-earnings multiples for the group are 35.3x and 18.7x, respectively and, as such, 35.3x and 18.7x represents the benchmark values for the multiples.
Assuming no differences in the fundamentals among peer group companies, it is possible to determine whether Walmart or Amazon are relatively fairly valued, relatively overvalued or relatively undervalued by comparing their market multiples to the benchmark value. Amazon appears to be overvalued because its trailing price-earnings ratio of 141.7x and forward price-earnings ratio of 62.5x are greater than the mean values. Likewise Walmart appears to be overvalued -- perhaps less overvalued than Amazon, but overvalued nonetheless -- as its trailing and forward multiples of 54.5x and 20x are greater than average.
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 Walmart and Amazon have higher-than-average expected earnings growth, a higher price-earnings ratio for both companies might be warranted. Also, if either company has lower than average risk, a higher price-earnings ratio might also be warranted.
One method of assessing differences in earnings growth on company multiples is to assess differences in PEG ratios (price-earnings-to-growth ratios). This ratio reflects the company's price-earnings ratio 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), but they are a good first proxy of growth-based comparable valuation.
Continuing with the analysis 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). Sustainable growth rates were calculated using three-year average returns on equity and three-year average earnings retention rates. We then calculate trailing and forward PEG ratios by dividing trailing and forward price-earnings ratios by the forecasted sustainable growth rates.
Table 2: Valuation data for peer group companies
Company | Ticker | PE Ratio | Forward PE Ratio | Sustainable Growth Rate (%) | Trailing PEG Ratio | Forward PEG Ratio | Beta |
Alibaba Group Holding Ltd | BABA | 43.5 | 24.3 | 25.5 | 1.7 | 0.95 | 2.45 |
Amazon.com Inc | AMZN | 141.7 | 62.5 | 10.8 | 13.1 | 5.79 | 1.81 |
Best Buy Co Inc | BBY | 20.3 | 13.1 | 14.7 | 1.4 | 0.89 | 0.38 |
Big Lots Inc | BIG | 11.1 | 8.8 | 17.5 | 0.6 | 0.50 | 1.59 |
Canadian Tire Corp Ltd | TSX:CTC.A | 23.2 | 11.3 | 10.6 | 2.2 | 1.07 | 0.62 |
Costco Wholesale Corp | COST | 32.0 | 29.3 | 16.3 | 2.0 | 1.80 | 1.17 |
Dollar General Corp | DG | 16.3 | 15.6 | 18.6 | 0.9 | 0.84 | 0.72 |
Dollar Tree Inc | DLTR | 11.3 | 13.3 | 18.2 | 0.6 | 0.73 | 0.57 |
Dollarama Inc | TSX:DOL | 24.0 | 17.5 | 76.5 | 0.3 | 0.23 | 1.71 |
eBay Inc | EBAY | - | 12.1 | 29.0 | - | 0.42 | 1.45 |
Pricesmart Inc | PSMT | 30.9 | 0.0 | 11.0 | 2.8 | 0.00 | 0.47 |
Target Corp | TGT | 14.8 | 15.0 | 13.3 | 1.1 | 1.13 | 0.72 |
Walmart Inc | WMT | 54.5 | 20.0 | 8.0 | 6.8 | 2.51 | 0.26 |
Average | 35.3 | 18.7 | 20.8 | 2.8 | 1.3 | 1.1 |
In Table 1, Walmart was identified as being overvalued relative to its peer group of companies. It was also identified as being less overvalued relative to Amazon. By incorporating information in Table 2 on profitability growth and risk, we can assess these claims further.
As can be seen, Walmart has a sustainable growth rate of 8%, a trailing PEG ratio of 6.8 against a benchmark PEG ratio for the peer group of 2.8, and a beta of 0.26, suggesting a lower level of risk than its peers overall. As such, Walmart does appear to be overvalued on a relative basis.
Amazon has a sustainable growth rate of 10.8%, a trailing PEG ratio of 13.1 against a benchmark PEG ratio for the peer group of 2.8, and a beta of 1.81, suggesting a higher level of risk than its peers overall. As such, Amazon also appears to be overvalued on a relative basis, confirming our initial hunch in Table 1.
But if you're going to invest in one of these overvalued companies, which company should it be?
Conclusion
In applying the method of comparables, we attempted to judge whether either of these two retail juggernauts 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 in comparing Amazon to Walmart, Walmart appears to deserve a deeper look. While Walmart's growth prospect are admittedly lower than Amazon's, Walmart is trading at a much more attractive valuation point and both trailing and forward PEG ratios stand at less than half of Amazon's PEG ratios.
It is now much more evident why gurus Joel Greenblat, Paul Tudor Jones (Trades, Portfolio), and Ken fisher have all been increasing their stakes in Walmart and why gurus Spiros Segalas (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), and Julian Robertson (Trades, Portfolio) have all been decreasing their positions in Amazon.
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This article first appeared on GuruFocus.
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The intrinsic value of WMT
