Best Buy Co., Inc. (BBY), The Home Depot, Inc. (HD): Pick a Winner and Stick to Your Guns

Not going anywhere

Imagine waking up without a Wal-Mart Stores, Inc. (NYSE:WMT) — you’re right, it’s not even thinkable. But why?

Unlike competitor Amazon.com, Inc. (NASDAQ:AMZN), Wal-Mart Stores, Inc. (NYSE:WMT) has built a sustainable business model that offers products and services needed by the masses. Amazon is a great firm that offers phenomenal value to customers, but I don’t think its rapid growth is sustainable (the only exception would be regarding the content found here).

For example, Wal-Mart boasts a net operating profit after taxes of about 4% while Amazon’s NOPAT is just above 1%. Given its business model and need to retain customers, Amazon cannot increase its margins. So, Amazon must win on price and convenience. But, why would customers come back if they could receive the same service or product for the same price through Wal-Mart? Further, consider the potential exodus of Amazon customers if taxes are added to the bottom line of purchases.

As the King of retail, Wal-Mart is poised to gain. For example, Wal-Mart’s barriers to entry are minuscule compared to Amazon trying to open brick and mortar locations. Wal-Mart’s Innovation Lab is already narrowing the gap. Further, the “buzz” around Amazon is leading to immense (and even undesired) attention — resulting in an inflated price.

As shown below, Amazon’s market cap exceeds its enterprise value. What’s this mean? Well, consider enterprise value as the price a firm would pay to acquire another firm. It is primarily calculated by adding market cap, debt, minority interest, and preferred sharers minus all cash. The reason is because the “acquirer” would keep the cash while absorbing the responsibilities for the debt.

WMT Enterprise Value data by YCharts

Given this information, would you want to acquire Amazon today?

Me neither. However, Wal-Mart’s consistent dividend and continued growth provide a remarkable alternative.

Conclusion

Even though Graham would likely not invest in any of the above firms, you can. Pick a plan and stick with it!

And remember, Wal-Mart and Home Depot are here to stay.

The article Pick a Winner and Stick to Your Guns originally appeared on Fool.com and is written by Brendan Marasco.

Brendan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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