Question 2.6: Consider the following data for Walmart Stores and Target Co...
Consider the following data for Walmart Stores and Target Corporation ($ billions):
| Walmart Stores (WMT) | Target Corporation (TGT) | |
| Sales | 469 | 73 |
| Operating Income | 28 | 5 |
| Net Income | 17 | 3 |
| Market Capitalization | 222 | 38 |
| Cash | 8 | 1 |
| Debt | 54 | 18 |
Compare Walmart’s and Target’s operating margin, net profit margin, P/E ratio, and the ratio of enterprise value to operating income and sales.
Plan
The table contains all of the raw data, but we need to compute the ratios using the inputs in the table.
Operating Margin = Operating Income/Sales
Net Profit Margin = Net Income/Sales
P/E Ratio = Price/Earnings = Market Capitalization/Net Income
Enterprise Value to Operating Income = Enterprise Value/Operating Income
Enterprise Value to Sales = Enterprise Value/Sales
Execute
Walmart had an operating margin of 28/469 = 6.0%, a net profit margin of 17/469 = 3.6%, and a P/E ratio of 222/17 = 13.1. Its enterprise value was 222 + 54 – 8 = $268 billion. Its ratio to operating income is 268/28 = 9.6, and its ratio to sales is 268/469 = 0.57.
Target had an operating margin of 5/73 = 6.8%, a net profit margin of 3/73 = 4.1%, and a P/E ratio of 38/3 = 12.7. Its enterprise value was 38 + 18 – 1 = $55 billion. Its ratio to operating income is 55/5 = 11, and its ratio to sales is 55/73 = 0.75.
Evaluate
Target has a slightly higher operating margin, net profit margin, and enterprise value ratio, but a slightly lower P/E ratio. This suggests that the market expects similar growth rates from Target and Walmart, despite large differences in size.