Global

Critical Comparison: Walmart Inc. (WMT) vs. The AES Corporation (AES)

Walmart Inc. (NYSE:WMT) shares are down more than -14.44% this year and recently decreased -1.90% or -$1.64 to settle at $84.49. The AES Corporation (NYSE:AES), on the other hand, is up 11.27% year to date as of 05/17/2018. It currently trades at $12.05 and has returned -2.11% during the past week.

Walmart Inc. (NYSE:WMT) and The AES Corporation (NYSE:AES) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect WMT to grow earnings at a 5.65% annual rate over the next 5 years. Comparatively, AES is expected to grow at a 8.60% annual rate. All else equal, AES’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Walmart Inc. (WMT) has an EBITDA margin of 5.56%. This suggests that WMT underlying business is more profitable WMT’s ROI is 10.00% while AES has a ROI of -0.80%. The interpretation is that WMT’s business generates a higher return on investment than AES’s.

Cash Flow



Cash is king when it comes to investing. WMT’s free cash flow (“FCF”) per share for the trailing twelve months was +2.22. Comparatively, AES’s free cash flow per share was -0.10. On a percent-of-sales basis, WMT’s free cash flow was 1.31% while AES converted -0.63% of its revenues into cash flow. This means that, for a given level of sales, WMT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. WMT has a current ratio of 0.80 compared to 1.10 for AES. This means that AES can more easily cover its most immediate liabilities over the next twelve months. WMT’s debt-to-equity ratio is 0.60 versus a D/E of 6.17 for AES. AES is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WMT trades at a forward P/E of 16.34, a P/B of 3.21, and a P/S of 0.50, compared to a forward P/E of 9.26, a P/B of 2.49, and a P/S of 0.75 for AES. WMT is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. WMT is currently priced at a -19.84% to its one-year price target of 105.40. Comparatively, AES is -6.88% relative to its price target of 12.94. This suggests that WMT is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. WMT has a beta of 0.53 and AES’s beta is 1.16. WMT’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. WMT has a short ratio of 3.25 compared to a short interest of 2.74 for AES. This implies that the market is currently less bearish on the outlook for AES.

Summary

Walmart Inc. (NYSE:WMT) beats The AES Corporation (NYSE:AES) on a total of 9 of the 14 factors compared between the two stocks. WMT is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. WMT is more undervalued relative to its price target. Finally, CELG has better sentiment signals based on short interest.

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