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Wal-Mart vs. Target: Which Is More Attractive Today?

Target might perform better in the short term, but Wal-Mart's ability to drive returns on invested capital gives it a long-run advantage.

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Ken Perkins: We think that Wal-Mart (WMT) is more attractive than Target (TGT) at current valuation levels. The two companies are very similar in many respects, but we think that there are a few key differences that investors should know. The first is that we give Wal-Mart a wide economic moat, but we do not assign Target an economic moat.

There are typically two sources of moats in retail: One is pricing power and the other is cost advantage. Firms that have a cost advantage tend to have above-average store productivity and below-average margins, whereas firms with pricing power tend to have above-average margins and below-average store productivity.

Ken Perkins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.