Wal-Mart's PR Clouds Demand Lower Valuations

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Deserved, undeserved, or most-likely--somewhere in between; Wal-Mart (NYSE: WMT) bears the burden of bad public relations. Its anti-union stance, labor cost controls, and corporate scandals have turned off a lot of would-be customers. This is a shame, since by and large it is just a firm that turns a profit, not a demon or evil force. Wal-Mart even does great charity at the local national level, which is often ignored.

But investors should not buy Wal-Mart until it trades at a significant valuation discount relative to its competitors, since these other firms do not have such ominous dark clouds over their brands.

International Bribery

Wal-Mart’s global growth could slow as the scandal of alleged bribery in Mexico, India, and other foreign markets inspire internal and governmental crack-downs.

Recently Wal-Mart has launched an exhaustive investigation at Bharti Wal-Mart, its joint venture in India, regarding possible violations of the Foreign Corrupt Practices Act (this is a U.S. anti-bribery law). The Indian venture has suspended some employees and decided to put the planned store openings on hold until after the inquiry is completed.

The U.S. Justice Department and the Securities and Exchange Commission are looking into accusations that Wal-Mart employees bribed Indian officials so it could open more stores quickly. After the Indian government’s go-signal to allow foreign companies invest into multi-brand retail store chains last September, Wal-Mart had been aggressive in trying to increase its foothold in the world’s second most populous country.  A Wal-Mart email stated, “We remain excited about the opportunity to grow our business in one of the world’s most vibrant economies.” Wal-Mart had launched a joint venture with billionaire Sunil Mittal’s Bharti Enterprises for wholesale operations in 2007.

A team of investigators summoned certain employees for questioning and barred them from entering Bharti Wal-Mart’s offices until after the probe. Wal-Mart would not comment about the details pending the completion of the inquiry.

India’s Enforcement Directorate is also asking for pertinent documents relating to Wal-Mart’s investments in the country, probably in response to a lawmaker’s letter to PM Manmohan Singh asking about irregularities in Wal-Mart’s investments.

Wal-Mart Does Good Things, Too

First and foremost, we ought to respect Wal-Mart’s enormous contribution to the economy. Only the armed forces of the United States and China employ a comparable number of people. Moreover, a substantial part of its market comes from rural Americans that many other companies have largely ignored.

Wal-Mart also participates in charitable efforts. It was one of dozens of companies that raised funds for the victims of Hurricane Sandy. Wal-Mart is also one of 39 companies that have each pledged the Red Cross $1 million.

The hurricane was definitely a big deal: it caused over $50 billion in damages. The effected area’s political leaders praised this fundraising effort. Chris Christie, New Jersey Governor said, “I want to thank Wal-Mart.” The Governor added, “They have been extraordinarily generous to the state of New Jersey in many different ways.”

Wal-Mart was not the only or most generous donor. The Red Cross has also received donations from corporations such as Target (NYSE: TGT), Kohl’s (KSS), and Citigroup (C) and others. All-in-all, Wal-Mart demonstrated that it can be a good corporate citizen. It was not a leader, but it did its part.

Customers have to Cross Picket Lines

The planned online and store protests against Wal-Mart failed to decrease traffic at its more than 4,500 stores and clubs spread across the U.S. The world’s largest retailer sold more than 1.3 million TVs, about the same number of dolls, and 250 thousand bicycles.  Wal-Mart said about 22 million customers were drawn by its promotions on November 23, higher than last year’s crowds.  Protests took place at 26 stores only, participated by less than 50 associates.

The protests were spearheaded by International Brotherhood of Electrical Workers and the United Food & Commercial Workers International Union to demand for better pay and benefits, predictable schedules, cheaper health care plans, options to work full-time, and a minimum wage of $13 an hour.  The union-backed protesters strongly oppose the retailer’s alleged manipulation of hours and benefits, and discrimination against women and minorities.

The organizers failed to win participation from Wal-Mart’s 1.4 million employees who probably feared for their jobs in spite of the alleged treatment they get from their employer.  A thousand protesters showed in Paramount, California; a hundred marched with signs in Secaucus, New Jersey; and about seventy people in Miami Gardens, Florida among others, but situations appeared to be generally normal.

Wal-Mart filed a complaint with the National Labor Relations Board which accused the unions of violating labor laws by picketing illegally and which questioned the unions’ capacity to represent its employees and asking for investigation and immediate injunction.

Comparing Valuations

Investors shouldn’t buy Wal-Mart shares until they are much cheaper than the shares of its peer firms. Today, this is clearly not the case:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> </tr> <tr> <td> <p>BIG</p> </td> <td> <p>Big Lots</p> </td> <td> <p>9.89</p> </td> <td> <p>0.31</p> </td> <td> <p>2.37</p> </td> <td> <p>10.88</p> </td> </tr> <tr> <td> <p>TGT</p> </td> <td> <p>Target</p> </td> <td> <p>13.93</p> </td> <td> <p>0.57</p> </td> <td> <p>2.51</p> </td> <td> <p>20.41</p> </td> </tr> <tr> <td> <p>WMT</p> </td> <td> <p>Wal-Mart Stores</p> </td> <td> <p>14.52</p> </td> <td> <p>0.51</p> </td> <td> <p>3.21</p> </td> <td> <p>26.13</p> </td> </tr> <tr> <td> <p>DLTR</p> </td> <td> <p>Dollar Tree</p> </td> <td> <p>16.63</p> </td> <td> <p>1.33</p> </td> <td> <p>6.12</p> </td> <td> <p>24.06</p> </td> </tr> <tr> <td> <p>DG</p> </td> <td> <p>Dollar General</p> </td> <td> <p>19.00</p> </td> <td> <p>1.06</p> </td> <td> <p>3.44</p> </td> <td> <p>38.95</p> </td> </tr> <tr> <td> <p>FDO</p> </td> <td> <p>Family Dollar Stores</p> </td> <td> <p>19.28</p> </td> <td> <p>0.85</p> </td> <td> <p>6.14</p> </td> <td> <p>NA</p> </td> </tr> </tbody> </table>

Paradoxically, most of these discount stores are pricey based on valuation. With the exception of Target and Big Lots (NYSE: BIG), these firms trade at earnings multiples that are greater than the S&P 500. Investors seeking defensive stocks in this industry should be selective and only consider these three stocks since they are attractively valued.

Many of these discounters priced for growth, presumably because investors expect consumers will flock to the cheap deals. This growth trend is “baked in” the stock prices of Dollar Tree, Family Dollar, and Dollar General.


Investors should refuse to pay a higher multiple for Wal-Mart than for the broader market given its bad public relations. As alternatives, they should consider Target and Big Lots. They are cheaper and better-liked companies. 

BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!

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