What Wal-Mart's Recent Scandal Means For Investors
Maxwell 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), the nation's largest private employer and world's largest retailer, has another big headache on its hands. Its majority owned Mexican unit has been charged with bribery. The market responded quickly as Wal-Mart's market capitalization fell about $12 billion in the two days following the announcement. Are there real risks to Wal-Mart, or has the market simply overreacted? That is quite a bit of movement for a company of Wal-Mart's size, complexity, steadiness, and a stock Beta of only 0.43.
The New York Times broke, and other news services quickly jumped on board, the multiyear story that Wal-Mart's Mexican unit had a history of making “contributions” to government officials, via outside attorney “delivery men', which often were followed up within a week or so by an approval for a new zoning or building permit. The company began an investigation in 2005, corroborating evidence was uncovered, and the matter was referred to in-house counsel. After a two-week review, counsel concluded no evidence of bribery occurred, and the matter was dropped for the time.
In December, 2011, upon learning that the New York Times had started an investigation, Wal-Mart renewed its investigation to see whether its Mexican unit had run afoul of U.S anti-corruption legislation. The company then notified the Securities and Exchange Commission, and the U.S. Justice Department of the matter. The company also announced hiring an overall compliance officer to ensure compliance with the U.S. Foreign Corrupt Practices Act. Wal-Mart has hired auditing firm KPMG and major Miami law firm Greenberg Traurig LLP for a worldwide review of compliance, and the enormous law firm Jones Day to review the Mexican situation specifically.
Further complicating the matter is that the head of Wal-Mart Mexico at the time, who is alleged to have signed off on the bribes, is Eduardo Castro Wright, currently is Wal-Mart’s vice chairman. He has already quit his board of directors post at MetLife. And Michael Duke, who at the time of the briberies was in charge of international operations, is now Chief Executive of the whole company. The amount of the bribes totaled $24 million, but as we all know, it is one thing to err, and another to try to conceal the misdeed. The mishandling of the matter for years should cost both men their jobs.
Other than that, remember that this is far from Wal-Mart's first scandal; although the others that come to mind were most often of a personnel nature, such as unionization, sex discrimination, and health insurance, for example. But is this matter likely to have a serious impact upon Wal-Mart's earnings? I hardly think so. Wal-Mart has not released first quarter earnings, and will not until mid-May. It is expected to report about $3.5 billion in what is historically its weakest quarter. Jobs will be lost, fines will be levied, for sure, and wrists will be slapped, but against the Rock of Gibraltar that Wal-Mart's earnings represent, only the slightest of dents will take place.
Wal-Mart has other issues. After decades of being the “Go Go” growth company of the retailing world, it has settled into middle age. It has a 5 year PEG of 1.45, indicating the stock is neither undervalued nor overvalued. Earnings are expected to rise in the 7% to 10% range annually through 2013. It pays a slightly above average dividend yield of 2.7%, and has raised its dividend now 37 years in a row. Despite its reputation as a supremely efficient retail enterprise, Wal-Mart's gross and operating margins are actually less than the average discount retailer's. I think an investor can do better.
Target (NYSE: TGT) has an interesting story. It bought out the leases from Zellers Stores, and plans to open about 130 stores in Canada beginning in spring of 2013. For now though, Target is paying rents and capital costs at this time without receiving any revenues, resulting in a temporary anchor on earnings. This will obviously remedy itself by the second half of 2013.
Target has a lower 5 year PEG than Wal-Mart at 1.20, and shows stronger margins to boot. Its dividend yield, currently at 2.1% is lower than Wal-Mart's, but Target is a strong dividend champion as it hiked its dividend each year for 44 years in a row. Target is a winning combination for a large retailing concern, and I endorse it for a long term holding.
There are a cluster of large, mass market discount stores, such as Dollar General, Family Dollar, and Dollar Tree, all with attractive valuations and worthy of consideration. But one of their brethren, Big Lots (NYSE: BIG) is taking a historic 24% one day stock dive as I am writing this. It represents Big Lots stock's worst day since 2008. The issue is twofold. First, management until today had been forecasting same store sales increases in the 2% - 4% range in the first quarter of 2012. Today it was learned that suddenly, management expects a same store sales decline.
Making matters worse is that the company's chief executive officer, Steve Fishman, went on an insider selling binge in late March. Can you spell SEC? With so many competitors chasing dollars, and management having some real issues with which to deal in addition to turning around the core business, I would not trust my dollars to Big Lots in any way, shape, or form.
StockCroc1 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.