Is Wal-Mart a Good Stock to Buy?

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Wal-Mart (NYSE: WMT) has been a good example of a long-term stock pick, rising 36% in the last five years despite the financial crisis and recession. The third quarter of Wal-Mart’s fiscal year ended in October 2012. Revenue for the quarter was up 3% compared to the same period in the previous fiscal year, and the company was able to increase its margins as well with the result being a 9% rise in earnings. Wal-Mart also repurchased shares, and so the growth rate of earnings per share was even higher. Operating income grew in the U.S., International, and Sam’s Club segments; the U.S. division is currently responsible for 58% of sales and 72% of segment operating income.

At a market capitalization of about $230 billion, Wal-Mart trades at 14 times trailing earnings. Combined with its modest growth rates and brand name, that looks attractive though it is not a screaming buy. Wall Street analyst expectations are for $5.38 in EPS for the fiscal year ending in January 2014, implying a forward P/E of 13. This would be in line with a slightly lower growth rate in earnings per share than the company announced in its last quarterly report, so it is very possible barring macro factors. Wal-Mart is also well known as a defensive stock pick and it does have a low beta, at 0.4.

Warren Buffett likes Wal-Mart: the retailer was one of Berkshire Hathaway’s ten largest positions by market value at the end of September, according to the holding company’s 13F filing (find more of Buffett's favorite stocks). The Bill and Melinda Gates Foundation is another major investor in the stock, reporting ownership of almost 11 million shares for the third quarter of 2012 (see more stocks that Gates's foundation is invested in). Cliff Asness’s AQR Capital Management increased its own stake by 18% between July and September (check out Asness's stock picks). Overall, Wal-Mart grabbed the #2 slot in our rankings of the most popular retail stocks among hedge funds.

The #1 place on that list belonged to Dollar General (NYSE: DG), and Dollar Tree (NASDAQ: DLTR) is another popular dollar store. Dollar stores were hot investments at one point, though each of these companies has underperformed the S&P 500 in the last year. Beta statistics are even lower here than at Wal-Mart, in the 0.1-0.2 range. There is a very small premium in terms of earnings, with both Dollar Tree and General trading at 14 times consensus earnings for the January 2014 fiscal year. Bottom-line growth last quarter was over 20% in each case, with Dollar General seeing a double-digit growth rate in revenue as well. The dollar stores are still intriguing stocks and would certainly be undervalued if they can continue their high growth--that might be challenging, however, and would be the core of any research on these companies.

Of course, Wal-Mart is traditionally compared to Target (NYSE: TGT) and to Costco (NASDAQ: COST). Target is priced about even with its larger peer, with essentially identical trailing and forward earnings multiples. Target did experience a slightly larger earnings growth rate in its most recent fiscal quarter versus a year earlier than Wal-Mart did, and as a smaller company its growth may be more sustainable; investors would be well served to consider both companies. Costco’s growth numbers have been even better, with revenue up 10% and net income up 30% from their levels in the same period in 2011. Even at a trailing P/E of 25 it might be worth looking at as a growth stock.

Frankly, a number of retail stocks have value potential. Target and Wal-Mart look like outright value plays as long as they can deliver some growth. The dollar stores are only slightly more expensive and have been doing well recently. Costco is the only stock we’ve covered here with earnings multiples above 20, and that company has recorded strong improvements in its net income. 

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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!

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