Wal-Mart Stores, Inc. (WMT) or Amazon.com, Inc. (AMZN), Which Is Better?

Wal-Mart and Amazon both go after the price conscious consumer. They buy in bulk and offer low prices, but Wal-Mart makes profits. A critical catalyst is the prospect of a national internet tax bill. Governments are always hungry for taxes, and sooner or later Amazon will have to charge more taxes on its goods, thus bringing its prices inline to Wal-Mart’s.

Quality growth

Wal-Mart is a consistent free cash flow producer, just like Costco Wholesale Corporation (NASDAQ:COST). Wal-Mart’s trailing 12 month free cash flow per share is $3.40 and Costco’s is $3.70. Costco Wholesale Corporation (NASDAQ:COST) shows that it is possible to compete with Wal-Mart, grow and be profitable. Critically, Costco differentiates itself from Wal-Mart by targeting higher income demographics. The company offers fewer goods in massive warehouses to increase efficiency.

Costco Wholesale Corporation (NASDAQ:COST)‘s annual sales around $50 billion give it room for growth. The company has experience outside of the U.S. with 33 stores in Mexico and 24 in the United Kingdom, in addition to a number of other countries. It is taking international expansion seriously, as it recently bought out its Mexican joint venture partner to give it more control in Latin America.

Costco’s profit margin of 2.0% and total debt to equity ratio of 0.47 are relatively healthy. Its P/E ratio of 25.1 isn’t cheap, but the company has substantial room to grow, and produces a healthy amount of free cash flow.

Conclusion

Wal-Mart Stores, Inc. (NYSE:WMT) is a better long term investment than Amazon.com, Inc. (NASDAQ:AMZN). Amazon is innovative, but a lack of profits, falling free cash flow and an awkward mix of physical and electronic products do not paint a pretty picture. With an internet tax bill looming in the distance, Wal-Mart will be able to keep its pricing advantage and move online. Fundamental investors looking for growth will find a better fit with Costco. The company is profitable, consistently produces free cash flow, has room to grow and has proven its ability to fend off Wal-Mart.

The article Wal-Mart or Amazon, Which Is Better? originally appeared on Fool.com and is written by Joshua Bondy.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale (NASDAQ:COST). The Motley Fool owns shares of Amazon.com and Costco Wholesale. Joshua 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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