Why I'm Buying Wal-Mart

When writing about my fundamental trades in EPIC Insights, I remind readers that when we buy stock, we are buying a piece of an operating business that will evolve over years. As investors, we perform due diligence in order to determine an estimate of fair value, wait for the market to provide us an opportunity to purchase shares at a discount to that fair value, and then act accordingly. While attention must be paid to the overall direction of the market, we are more concerned with the individual companies and the opportunities they provide.

With these directions in mind, we turn our attention to retailers. There is no dispute that the current recession has hammered retail businesses. Many once prominent chains no longer exist and others are retrenching. However, as markets have rallied from their March lows, the broadline retailers have been on a tear. With the Dow still 3% lower on the year, broadline retailers are 42% higher. Within the group we also see large divergences with the most speculative names 50% higher while their more conservative brethren show negative year-to-date performance. Within this divergence, I see opportunities.

Of the 17 names constituting this market segment, three show negative year-to-date performance- Pricesmart (PSMT), Costco (COST), and Wal-Mart (WMT). While I am unfamiliar with PSMT and find COST to be expensive, WMT offers excellent value. Despite its size, WMT consistently finds ways to improve its core business. Its cash-conversion cycle is at its best level and has improved by 24 days since 2002. Return on equity and profit margins are ahead of those of WMT's peers and turnover ratios continue improving. In an environment where more shoppers are migrating to its segment, WMT continues to capture share and improve its business.

With such a track record, you would expect the shares to shine. Instead, WMT lags its peers. This has resulted in an attractive valuation prospect with the shares trading at a 2.2% dividend yield and a 14 P/E ratio.

I have monitored this company for years with the hopes of buying the stock at a discount to fair value. With the stock down on the year, that time has come. Using a variety of valuation models, I believe fair value is $59. At current prices, the market provides us the opportunity to own an excellent company at a 16% discount to fair value, and I will take advantage.

I view purchasing shares in WMT similarly to the decision I made months ago to buy Coca-Cola (KO). Seeing an opportunity to own an excellent franchise at a discount to fair value, we purchased KO and now have a 16% profit. WMT holds a similar promise. By waiting for the market to provide us with opportunities, we can build a portfolio of excellent companies at reasonable valuations that will perform for years into the future. Stocks are ownership interest in operating businesses, and strong businesses will ultimately prevail. I recommend a position in WMT as this week's fundamental trade.

Comments

[Ravi Nagarajan:]

Good article.

I came to a similar conclusion yesterday as well:

www.rationalwalk.com/?...

Jun 02 08:40 AM

[madmilker:]

* 1,042 Quick Read Jun 02, 2009

Related Stocks:

* SHLD, WMT


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o Noise Free Investing
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Wal-Mart is a great company in a tremendous competitive position. However, that doesn't make it a great investment. If the company's returns track its business results over the next ten years you might be in for a disappointment. Assuming a 10% sales growth means that WMT will sell 440 billion next year and over 1 Billion in ten years time. It's possible, of course, but it's difficult to add 40B in sales next year.

Sears on the other hand offers some interesting scenarios. One is the real estate another the liquidation and yet another the successful transformation of the company. The real estate is often in desirable locations (the last to decline in value and first to go back up); Target, Home Depot, and others would love to buy the best 300-400 stores from Sears. In fact, as Ackman pointed out yesterday, this is one of the reasons he wanted to free up capital for Target.

The less desirable locations are also sometimes rented at well below market leases. Inventory reductions from store closures or sales turns into cash which can either be reinvested in the business or returned to shareholders.

While an investment in Sears is not as compelling as it was when the company was trading in the high 20's per share, I believe it will trump WMT over the next 5-10 years.

Time will tell, thanks for the post.
Jun 02 08:48 AM |Report abuse | Link | Reply
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Sorry that should read $1 Trillion in tens years time, not $1 Billion.
Jun 02 08:51 AM |Report abuse | Link | Reply
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o madmilker
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People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

quote*"Considering that there are over 30,000 ships at sea this morning," writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, "the total number of organisms and species in this global 'bioflow' on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species."

Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel's arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!

tat is $9 billion a year in hidden taxes to all Americans...
cheap ain't chic and it cost America............jobs!

quote*Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too.*end quote!

worldthinktank.net...

"After bragging in the late 1990s about budget surpluses, when in fact the general government was in deficit (not surplus) despite the highest tax revenue share of the economy in peace-time history, we know they were claiming trust fund surpluses as their own. They were understating their claimed deficits by mixing in surpluses of trust funds."

mwhodges.home.att.net/...

Jun 02 09:40 AM

[Gabriel:]

Do you believe 16% to be a comfortable margin of safety?

Jun 02 11:00 AM

[jayfram:]

What about the prospects for increased unionization with the passage of "card check" or some variation of it?

Jun 02 12:47 PM

[RiskReturnO...:]

Timing of the WMT trade will be key. Perhaps watch for signs of breakdown in XLY (discretionary names) and continued strength of XLE (or crude oil prices above $65). This will create another wave of consumer distress, and support the WMT trade.

If traders get too optimistic on US economy, they'll dump XLP (includes WMT) and get more long XLY ... so watch for right entry point on WMT. Long term it will be great either way!

Jun 02 01:57 PM

[Consumer Pr...:]

My concern over WMT seems to be very rarely discussed, perhaps for obvious reasons: It is the class action suit pending against WalMart charging pay and promotion discrimination against women with over 1 million women in the class.

What is the current status, what are the most likely outcomes and corresponding impacts?

Jun 02 02:58 PM

[Albert Ling:]

If you bought KO a few months ago and are up just 16% you've underperformed the market significantly... KO was one of the worst places to be in since mid-march

I think both WMT and KO are good buys at the moment though... very very defensive and with reasonable upside potential

Jun 02 05:51 PM

[muzik.man:]

As a Walmart weekly shopper I have been stunned by continual grocery price increases over the past year. My estimate is my own grocery basket has gone up 15-20%. Some of it due to gas prices and some due to employee benefit increases, I'm sure. But, STILL, these are hefty increases.

A tell-tale example is Cool Whip (16 oz.) which has gone from $1.99 to $2.49. I pick this one because it is not really affected by corn prices, etc. Bananas were ,49 per pound but are now .64 per pound. Wine has gone up about 20% across the board this year. I could go on and on, but, trust me, the price increases are fairly uniform at Walmart grocery.

Why does this matter? Well, if sales went up 10%, then that means that FEWER items were sold, and that Walmart may have had LESS customers than the year before. That is exactly what is happening with me. I now get more of my groceries from Aldi, a niche, discount grocery retailer. They regularly beat Walmart prices by about 20% (bananas there are .45/lb.) Judging from their busy parking lot, many other Walmart customers are finding their way to lower prices as well.

I am sure there are other discount grocers around the country that must be siphoning business from Walmart. Yet, strangely, I don't see anything in the financial pages about Walmart's incredible price surge over the past year. Are these cracks in the ship?

Jun 04 09:24 AM