Wal-Mart – Trading at Every Day Low Prices
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In this economy, every investor is looking for a solid stock with strong growth, stable dividends, and potential to return wealth to shareholders. They are all looking for a Wal-Mart (NYSE: WMT).
Background
Wal-Mart is the largest retailer in the world and is approaching 10,000 stores around the globe. It is the biggest revenue producer and private employer worldwide. On a weekly basis, one hundred million customers visit Wal-Mart stores. Wal-Mart is focused on undercutting its competitors, expecting to lower prices by $2 billion over the next two years. Even during the recession, the retailer paid almost $1 billion in bonuses to all employees and an additional $790 million for 401(k) and similar programs. The company has had tremendous international success overseas, especially in China where it is adapting to the needs of the society by, for example, allowing Chinese consumers to select from live fish tanks and seafood. Every day, low prices at Wal-Mart save families an estimated $2,500 a year and create more than 210,000 jobs.
The Promising Stock
A quick screen of the stock fundamentals shows strong potential. Wal-Mart offers a hardy dividend of 2.71%. Earnings per share are currently at $4.51 and projected to increase to $5.27 in the next year. Calculated as net income divided by shareholder’s equity, EPS is a valuable metric for investors, who are looking for a growing net income and a stable or decreasing number of shares outstanding. Valuation metrics shows that the company is undervalued with a P/E of 13.8 and EV/EBITDA of 7.5 below the industry averages of 18.45 and 8.89, respectively. The P/E ratio is the price divided by earnings per share. Investors want to pay the lowest price they can for a stock, seeking below average P/E’s. EV/EBITDA, calculated as enterprise value divided by earnings before interest, taxes, depreciation, and amortization, is a metric that compares the market price of the entire company to its earnings. Similar to P/E, investors wish to pay the lowest price possible for the company, making Wal-Mart’s EV/EBITDA ratio very attractive. Main competitors, including Target, Costco and Dollar General, cannot compete with Wal-Mart’s market cap or returns on equity and invested capital.
For the past half-decade, revenues, earnings, and dividends have been increasing at a stable rate, even during the recession. With discretionary incomes rising and store prices falling, the top line should experience even greater growth with same-store sales growing more than 1.5% year-on-year. Wal-Mart’s 750 stores in the BRIC countries will also contribute substantially and expose the company to emerging market growth. Shareholders should see healthy returns as capital expenditures are expected to decrease from a focus on improving performance at existing locations and using excess cash for share buybacks to reward investors. Using historical averages of revenue growth in Wal-Mart’s three segments – Wal-Mart US, Wal-Mart International, and Sam’s Club – and projecting them forward along with Wal-Mart’s expenses, a discounted cash flow model of Wal-Mart’s free cash flows brings the intrinsic share price to about $76.14. Compared to its current $59 price, Wal-Mart is trading at least at a 30% discount.
But It’s Not All Sunshine and Rainbows
Although growth has continued during the recession for Wal-Mart, dollar stores have been stealing market share gradually and will continue until the economy shows better signs of recovery. Dollar stores have been siphoning customers with lower incomes who prefer the convenient locations and smaller package sizes. Even with such an aggressive pricing strategy, Wal-Mart’s best hope to regain market share is a strengthening economy. And with 2012 first quarter GDP growing at a lower-than-expected pace of 2.2% combined with poor unemployment data, recovery is uncertain.
Wal-Mart’s societal image as an evil empire doesn’t help much either. Wal-Mart is constantly accused of driving out small businesses where it establishes its super or hypermarkets. Numerous lawsuits have been filed for underpaying workers, gender discrimination, sexual orientation discrimination, and the list goes on and on. Recently, and most importantly, in April of 2012, a former executive of Wal-Mart de Mexico, where Wal-Mart has the greatest international presence, was accused of paying bribes to officials in Mexico for construction permits over six years ago. Reports from Bloomberg estimate fines of up to $6.5 billion and even executive departures from the company. To add to that, transportation costs are soaring and hurting Wal-Mart’s bottom line. Crude oil prices are now at $98.59 per barrel, near the top of the 52-week range of $76 to $111. The one-year forecast is $113 per barrel, and current regular nationwide gas prices are over $4.15 per gallon.
So What Does This Mean?
BUY, BUY, BUY! Wal-Mart’s depressed share price makes it a great pick for investors ready to buy and hold for at least half a year. Wal-Mart has recovered successfully from all past litigation and will do so again. $6.5 billion in settlement fees is less than 1.7% of all of Wal-Mart’s revenues, and this is not the first time bribery claims were filed in Mexico, to say the least. Though energy prices are rising, this is a sector-wide problem. Still, Wal-Mart is working hard to increase supply chain efficiencies, most notably by controlling deliveries from manufacturers directly to avoid costs of hauling goods from distribution centers to stores nationwide. Finally, very conservative measures of projected discounted cash flows show a 30% upside, but more realistic measures based on analyst recommendations show a whopping upside of over 70%. Wal-Mart is a great buy at a great price.
This article is written by Simon Osipov and edited by Jake Mann. They don't own shares in any of the companies mentioned in this article.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.If you have questions about this post or the Fool’s blog network, click here for information.
