Why this Retail Giant is a Buy after Q3 Earnings
Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wal-Mart (NYSE: WMT) reported its financial results for the third quarter of fiscal 2013 few days ago. The company's EPS of $1.08 has beaten analysts' estimate of $1.07, and improved by 11.3% year-over-year. Net sales were $113.2 billion, an increase of 3.4% from $109.5 billion in the third quarter last year. Net sales for this quarter included a negative currency exchange rate impact of approximately $1.7 billion, which means that without the currency impact net sales would have been $114.9 billion. In this article I’ll share my view of why I believe these financial results should be considered positive for the stock.
Efficient cost control helped improving EPS: Wal-Mart recently announced it was cutting back on CAPEX by $500 million for 2013 and 2014. The company has reduced its shipping costs by 4.2%.
Strategy to increase sales seems working: The strategy of focusing more on smaller store formats, while online sales and warehouse merchandise have already borne fruit for the company.
Wal-Mart’s Warehouse Retailing Business Growing Fast
The warehouse merchandise subsidiary of Wal-Mart, known as Sam's Club, has been able to outperform its parent, growing by 2.7% as compared to Wal-Mart's US comp of 1.5% and international comp of 2.4%. Such performance would enable Wal-Mart to strengthen its position against Costco (NASDAQ: COST), the world leader in warehouse retailing.
Costco’s success in warehouse retailing is a result of the company’s strategic focus on its membership fee. This stream of revenue is going up by 10-11%, increasing EPS quite swiftly. However, Sam's Club has emerged as a tough competitor for Costco.
Key Drivers for Wal-Mart’s Stock
- Economic slowdown: The biggest driver for the stock is the ongoing worldwide economic slowdown, thanks to Wal-Mart’s slogan “Save money. Live better.” During recessionary periods consumers tend to cut back on expenses. As a result, they turn to discount retailers like Wal-Mart for buying.
- Early holiday season discount: Wal-Mart will see a growth in sales because of enhancement of its Christmas and Holiday plan. Each year, the company provides 10% discount on food items during most of the month of December. They’ve decided to start these two weeks earlier, which could turn out to be a good boost for sales.
- International expansion: After decades of relentless expansion in the U.S., Wal-Mart started cannibalizing its own business in many markets since last few years. Currently, the company operates under 69 different banners in 27 countries. With fiscal year 2012 sales of approximately $444 billion, Wal-Mart employs 2.2 million associates worldwide.
Wal-Mart’s ROIC Remains Steady
Wal-Mart has been maintaining a steady ROIC (return on invested capital) for quite some time. ROIC measures if a company has an economic moat -- the ability to earn returns on its invested capital above that capital's cost. The higher the ROIC, the more efficiently the company uses capital.
Wal-Mart's ROIC remains more elevated than that of Costco and Target (NYSE: TGT) over the last five years, which is indicative of Wal-Mart's greater efficiency in using capital than its peers. While many look to ROE (return on equity) as an indication of how effective management has been at running the business, I look to ROIC because it cannot be increased by adding more leverage. Wal-Mart is being valued higher than Target. The P/E and EV/EBITDA of Wal-Mart is higher than that of Target. This is simply because market is willing to attach more value to a stock with higher ROIC. This becomes even more interesting when you realize that the comparable store sales of Target have grown by 2.9%, while those of Wal-Mart have only grown by 2.5%.
The Bottom Line
In 2008, the Wal-Mart’s annual revenue was $379 billion. In 2010, it was $408 billion, and in 2012 it's $444 billion. With an estimated forward P/E multiple of merely 13.21, the share price looks reasonably cheap. The company has been one of the greatest income plays in history. It has raised its dividend for 37 consecutive years, and it raised it again this year. I would recommend buying Wal-Mart at current prices.
Anindya7 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!