Walmart vs. Home Depot: Which Mega-Cap Retailer is a Better Buy?

Walmart Inc. (WMT) operates retail, wholesale, and other units worldwide. The Bentonville, Ark.-based company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. In comparison, The Home Depot, Inc. (HD), which is based in Atlanta, Ga., operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products.

U.S. retail sales rose 0.7% in September, and several companies have been reporting strong third-quarter earnings. Nevertheless, concerns surrounding the economic recovery, due to the continuing spread of COVID-19, rising inflation, and a supply chain crisis, have raised questions about the sustainability of the market’s uptrend. Amid this environment, we think it could be wise to invest in mega-cap retailer stocks because of their market dominance and solid long-term growth prospects. Both WMT and HD could generate steady returns in the long run.

HD’s shares have gained 9% in price over the past month, while WMT has returned 3.7%. Also, HD’s 16.1% gains over the past six months are significantly higher than WMT’s 6.6% returns. Furthermore, HD is the clear winner with 40.2% gains versus WMT’s 2.3% returns in terms of year-to-date performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 19, WMT announced plans to build a new, high-tech distribution center for fresh and frozen groceries in Spartanburg County, which is set to open in 2024. David Guggina, senior vice president, automation and innovation at Walmart U.S., said, “Walmart’s high-tech grocery distribution center will include game-changing innovations that are radically disrupting the supply chain, getting products onto shelves for our customers even faster, while saving time for our associates.”

On October 6, HD announced that it would join Walmart’s new delivery as a service business. Stephanie Smith, senior vice president of the supply chain for HD, said, “This partnership brings us even closer to our goal of offering same-day or next-day delivery to 90 percent of the U.S. population.”

Recent Financial Results

WMT’s total revenue increased 2.4% year-over-year to $141 billion for its fiscal second quarter, ended July 31, 2021. The company’s adjusted operating income grew 10.6% year-over-year to $7.20 billion. Also, its adjusted EPS came in at $1.78, up 14.1% year-over-year.

HD’s sales increased 8.1% year-over-year to $41.12 billion for its fiscal second quarter, ended August 1, 2021. The company’s operating income grew 9.4% year-over-year to $6.64 billion, while its net earnings came in at $4.81 billion, representing an 11% year-over-year increase. Also, its EPS was $4.53, up 12.7% year-over-year.

Past and Expected Financial Performance

WMT’s net income and EPS have grown at CAGRs of 24.6% and 26.7%, respectively, over the past three years. Analysts expect the company’s revenue to increase 1.1% in its fiscal year 2022, and 2.5% in fiscal 2023. The company’s EPS is expected to grow 15.1% in fiscal 2022, and 4.6% in fiscal 2023. Also, its EPS is expected to grow at an 8% rate per annum over the next five years.

In comparison, HD’s net income and EPS have grown at CAGRs of 15.6% and 18.7%, respectively, over the past three years. The company’s revenue is expected to increase 10.3% in its fiscal year 2022, and 1.4% in fiscal 2023. Its EPS is expected to grow 21.9% in fiscal 2022, and 4.1% for fiscal 2023. Also, HD’s EPS is expected to grow at a 10.6% rate per annum over the next five years.

Profitability

WMT’s trailing-12-month revenue is 3.92 times HD’s. However, HD is more profitable, with a gross profit and net income margins of 33.72% and 10.55%, respectively, compared to WMT’s 25.10% and 1.78%.

Moreover, HD’s 1,841.81%, 20.86% and 33.08% respective ROE, ROA, and ROTC are higher than WMT’s 12.32%, 7.76%, and 12.30%.

Valuation

In terms of forward EV/S, HD is currently trading at 2.95x, which is 255.4% higher than WMT’s 0.83x. Furthermore, HD’s 17.58x forward EV/EBITDA ratio is 40.6% higher than WMT’s 12.50x.

So, WMT is relatively affordable here.

POWR Ratings

WMT has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, HD has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

WMT has an A grade for Sentiment. This is justified because Wall Street analysts expect the stock’s price to hit $173.29 in the near term, which indicates a potential 16.5% upside. In contrast,  HD has a C grade for Sentiment because  Wall Street analysts expect the stock to hit $359.25 in the near term, which indicates a potential 3.6% decline.

Also, WMT has a B grade for Value, which is consistent with its 0.82x forward EV/S, which is 58.4% lower than the 1.98x industry average. However, HD has a D grade for Value, which is consistent with its 2.93x forward EV/S, which is 104.6% higher than the 1.43x industry average.

 WMT has an A grade for Stability, which is in sync with its 0.50 beta. In comparison, HD has a B grade for Stability.

Of the 41 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #9. However, HD is ranked #24 of 60 stocks in the B-rated Home Improvement & Goods industry.

Beyond what I’ve stated above, we have also rated the stocks for Quality, Growth, and Momentum. Click here to view all the WMT ratings. Also, get all the HD ratings here.

The Winner

The retail industry is expected to grow significantly ahead of the holiday season, with strong demand for goods. While both WMT and HD are expected to benefit, we think it is better to bet on WMT now due to its lower valuation and better analyst sentiment.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Grocery/Big Box Retailers industry here. Also, click here to access all the top-rated stocks in the Home Improvement & Goods industry.

WMT shares were trading at $147.93 per share on Thursday afternoon, up $0.40 (+0.27%). Year-to-date, WMT has gained 3.84%, versus a 23.61% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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