The grocery industry is known for its inherent stability, which persists even in the face of economic uncertainties. This resilience stems from the fact that the demand for essential food items remains unwavering, irrespective of economic fluctuations, ensuring a reliable and steady revenue stream for companies operating within this space.
Given the backdrop, in this article, I have evaluated prominent grocery stocks, Walmart Inc. (WMT) and Costco Wholesale Corporation (COST), to determine which one could be a better buy. Before delving into the comparison of the fundamentals of these stocks, let us examine the industry prospects first.
The U.S. grocery sector is poised for a 5.6% expansion in 2023, reaching an impressive $1.50 trillion in size, according to findings from Coresight Research. This growth is being driven by several factors, including reduced inflation rates and the increasing significance of non-traditional grocery retailers.
Moreover, the supermarkets and hypermarkets sector is anticipated to experience a CAGR of 6.5%, reaching a market value of $4.35 trillion by 2027. This growth can be attributed to technological advancements, particularly in the precise analysis of retail data, which plays a pivotal role in meeting customer expectations.
Furthermore, the retail sector is expected to remain robust this year, thanks to ongoing technological advancements, particularly the growing significance of e-commerce, which has been on the rise since the onset of the pandemic.
Considering the promising industry prospects, WMT and COST are expected to benefit from the industry’s tailwinds. However, in terms of price performance, WMT has gained 2.1% over the past month compared to COST’s marginal decline.
Moreover, WMT has surged 21.7% over the past year to close the last trading session at $164.56, while COST’s shares gained 9.7% during the same period to close the last trading session at $559.76.
Keeping all these factors in mind, let us dive into the fundamentals of the featured stocks to determine which Grocery/Big Box Retailers stock could be a better pick.
On July 26, WMT and PepsiCo, Inc. (PEP) revealed a seven-year partnership to invest $120 million in initiatives aimed at assisting U.S. and Canadian farmers in enhancing soil health and water quality. Through this collaboration, they plan to implement various programs and support systems to encourage the adoption of regenerative agriculture practices on over 2 million acres of farmland.
The goal is to achieve about 4 million metric tons of greenhouse gas emission reductions and removals by 2030, which is approximately equal to powering 778,300 homes for one year.
Conversely, on September 8, COST paid its shareholders a quarterly dividend of $1.02 per share on the company’s common stock. The company’s annual dividend of $4.08 translates to a 0.73% yield on the prevailing prices, while its four-year average dividend yield is 1.38%.
Its dividend payouts have grown at CAGRs 4.7% and 13.2% over the past three and five years, respectively. Also, it has a record of 18 years of dividend growth.
Recent Financial Results
WMT’s total revenues for the second quarter of fiscal 2024 (ended July 31, 2023) increased 5.7% year-over-year to $161.63 billion, while its operating income rose 6.7% year-over-year to $7.32 billion. Moreover, the company’s attributable net income amounted to $7.89 billion and $2.92 per share, up 53.3% and 55.3% from the prior-year quarter, respectively.
On the contrary, COST’s total revenue increased 2% year-over-year to $53.65 billion in the fiscal third quarter that ended May 7, 2023. However, its operating income declined 6.3% from the year-ago value to $1.69 billion. Additionally, the company’s attributable net income came in at $1.30 billion and $2.93 per share, down 3.8% and 3.6% from the prior-year quarter, respectively.
Past And Expected Financial Performance
WMT’s revenue grew at a 5.2% CAGR over the past three years. Its revenue is expected to increase 5.4% this year and 4.5% in the third quarter ending October 2023. Its EPS is expected to be $6.48 this year, $1.51 in the current quarter ending October 2023, and $1.66 in the next quarter ending January 2023.
Conversely, over the past three years, COST’s revenue grew at a CAGR of 13.5%. Analysts expect COST’s revenue to increase 9.8% this year and 8.2% in the fourth quarter (ended August 2023). Its EPS is expected to be $14.57 this year, $3.34 in the current quarter ending November 2023, and $3.57 in the next quarter ending February 2023.
In terms of forward non-GAAP P/E, COST is currently trading at 38.34x, 50.9% higher than WMT, which is trading at 25.40x. Moreover, COST’s forward EV/EBITDA multiple of 23.79x is 82% higher than WMT’s 13.07x. Additionally, COST’s forward Price/Sales multiple of 1.03x is 49.3% higher than WMT’s 0.69x.
Thus, WMT is more affordable.
WMT is more profitable, with a trailing-12-month gross profit margin of 24.20%, compared to COST’s 12.28%. Additionally, WMT’s trailing-12-month EBIT margin and levered FCF margin are 4.11% and 2.97%, respectively, compared to COST’s EBIT margin of 3.49% and levered FCF margin of 1.83%.
WMT has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, COST has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WMT has a B grade for Quality, justified by its higher-than-industry profitability. WMT’s trailing-12-month cash per share of $6.16 is 220.7% higher than the industry average of $1.61. Also, its trailing-12-month asset turnover ratio of 2.51x is 176.2% higher than the industry average of 0.91x.
On the other hand, COST has a C grade for Quality, justified by its mixed profitability. The stock’s trailing-12-month ROCE of 27.56% is 144.4% higher than the industry average of 11.30%. However, its trailing-12-month gross profit margin of 12.28% is 62.4% lower than the industry average of 32.61%.
Moreover, WMT’s B grade for Growth is justified by its robust financial growth in the last reported quarter. Conversely, COST’s C grade for Growth is in sync with its mixed growth in the last reported quarter.
Among the 38 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #3, while COST is ranked #30.
While both leading grocery stocks, WMT and COST, have opportunities in the industry, it appears that WMT is the more profitable choice at the moment due to its stronger financial performance and more attractive valuation, especially when considering COST’s relatively weaker financials and higher valuation.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.
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WMT shares were trading at $165.37 per share on Thursday afternoon, up $0.81 (+0.49%). Year-to-date, WMT has gained 17.97%, versus a 18.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run. More...
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