Walmart Inc. (NYSE:WMT) shares are down more than -3.03% this year and recently decreased -1.36% or -$1.32 to settle at $95.76. The Procter & Gamble Company (NYSE:PG), on the other hand, is down -11.36% year to date as of 10/10/2018. It currently trades at $81.44 and has returned -1.91% during the past week.
Walmart Inc. (NYSE:WMT) and The Procter & Gamble Company (NYSE:PG) 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 5.56% annual rate over the next 5 years. Comparatively, PG is expected to grow at a 6.20% annual rate. All else equal, PG’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 25.43% for The Procter & Gamble Company (PG). WMT’s ROI is 10.10% while PG has a ROI of 13.10%. The interpretation is that PG’s business generates a higher return on investment than WMT’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. WMT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.66. Comparatively, PG’s free cash flow per share was +0.55. On a percent-of-sales basis, WMT’s free cash flow was 0.39% while PG converted 2.07% of its revenues into cash flow. This means that, for a given level of sales, PG 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 0.90 compared to 0.80 for PG. This means that WMT can more easily cover its most immediate liabilities over the next twelve months. WMT’s debt-to-equity ratio is 0.76 versus a D/E of 0.61 for PG. WMT is therefore the more solvent of the two companies, and has lower financial risk.Valuation
WMT trades at a forward P/E of 19.96, a P/B of 3.96, and a P/S of 0.56, compared to a forward P/E of 17.31, a P/B of 3.98, and a P/S of 3.06 for PG. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. WMT is currently priced at a -8.02% to its one-year price target of 104.11. Comparatively, PG is -3.3% relative to its price target of 84.22. This suggests that WMT is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. WMT has a beta of 0.51 and PG’s beta is 0.55. WMT’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. WMT has a short ratio of 2.87 compared to a short interest of 2.89 for PG. This implies that the market is currently less bearish on the outlook for WMT.Summary
Walmart Inc. (NYSE:WMT) beats The Procter & Gamble Company (NYSE:PG) on a total of 8 of the 14 factors compared between the two stocks. WMT has higher cash flow per share and higher liquidity. In terms of valuation, WMT is the cheaper of the two stocks on book value and sales basis, WMT is more undervalued relative to its price target. Finally, WMT has better sentiment signals based on short interest.