The King is Here to Stay
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The king of retailers, Wal-Mart (NYSE: WMT), was the subject of some severe criticism during 2012, whether its about a fire at Bangladesh’s apparel factory, U.S. lobbying practices, or the recent bribery charges in Mexico. Fortunately, the company didn’t get a major hit by these factors in 2012; but according to some analysts, this fresh bribery scandal could cause significant damage to the company's stock. As soon as the news was released, Wal-Mart’s shares went to a 6 month low in a matter of hours. The question is, will this have an effect on Wal-Mart in the long run?
Bribery scandal in Mexico
The latest bribery scandal in Mexico reveals that Wal-Mart’s CEO Mike Duke knew about the bribery scheme going on in Mexico. According to the reports, Wal-Mart spent millions of dollars in bribes in order to get building permits in Mexico. Wal-Mart says that it has been conducting an internal investigation in order to know more about the scandal. As part of this plan, the company has also looked for the possible scandals in China, Brazil, and India. Moreover, the company announced that it is doing its best to report all available information to the Department of Justice and SEC.
In order to get an approval to build a store in Teotihuacan (the site of ancient ruins), the company paid nearly $52,000. However, Wal-Mart’s spokesman Dave Tovar denied that the company’s CEO knew about this bribery. The U.S. lawmakers said that they had made an email public, which showed that Wal-Mart General Counsel Thomas Mars told company’s CEO and executive director about bribes being paid for Teotihuacan store.
Fire at Apparel Factory in Bangladesh
In April 2011, Gap announced that it would pay $20 million to its suppliers in South Asia to meet safety standards. On the other hand, Wal-Mart first announced that it would help its suppliers build fire proof factories, but later on it decided not to do so. In November 2012, at least 112 workers were killed in a fire at one of Bangladesh’s apparel factories. According to sources, the factory was Wal-Mart’s key supplier and was producing merchandise for the company. As a result, Wal-Mart faced severe criticism for not ensuring safety standards in its suppliers’ factories. This created a lot of negativity among Wal-Mart’s customers, who thought that the company would go to any extent to reduce its costs of goods sold.
Wal-Mart’s lobbying practices
The Indian government has recently appointed a retired judge to investigate Wal-Mart’s lobbying practices. In December, 2012, the company disclosed that it had paid $25 million in lobbying U.S. government officials in order to gain access to markets throughout the world, especially India. India’s major political party, Bharatiya Janata, has criticized the government’s decision to allow foreign retailers to enter the Indian market. Moreover, the Bharatiya Janata party has equated this to bribery and suggests that the government and Wal-Mart should be penalized for doing so.
Wal-Mart has been facing a lot of issues lately, but the fact is that the company’s stock is still doing really well. A YTD capital appreciation of almost 18% is testimony to this. Moreover, it’s yielding 2.3% on its dividend as well. A strong ROE of 22.96% shows that the company’s still earning a lot of money for its shareholders.
Despite the fact that Wal-Mart faced a lot of issues in 2012, investors haven’t lost faith in the giant retailer. When compared to Costco (NASDAQ: COST) and Target (NYSE: TGT), Wal-Mart’s dividend yield, ROE, ROA, and EPS are much higher.
Currently, Wal-Mart is trading at a P/E (ttm) of 14.19x and is priced at $68.98. Using an industry P/E of 18.5, we can calculate Wal-Mart's value through the earnings estimates.
According to the consensus estimates, Wal-Mart's value comes out to be $99. This shows it's a huge undervalued stock and has an upside potential of almost 39%.
There is no doubt that Wal-Mart had a lot of hiccups in 2012, but it’s still gold for its shareholders. Since Wal-Mart’s inception, it has been facing issues, but it has always shown resilience. When you are as big as Wal-Mart, small things don’t matter for you in the long run. In short, the king of retailers will continue to mint money in the future, providing great returns to its shareholders.
Vamosrafa7 has no position in any stocks mentioned. 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!