10 Reasons to Buy Wal-Mart

1. Place to be for a consumer during recession

Wal-Mart Stores Inc. (WMT) has been on a roll during the recession, outperforming peers such as Target Corp (TGT) as cash-strapped consumers trade down to discount stores. There is a 'new normal' in which people want to save money and are getting smarter about saving money. Even if the economy begins to grow, it likely will take some time before consumers hit by lost jobs, lower home values and tighter access to credit start spending more.

2. Increasing sales and profits faster than its competitors around the globe

Wal-Mart ended the fiscal year net sales up 7.2 percent to more than $400 billion. Sales in Wal-Mart's international business, which now accounts for almost 25 percent of its revenue, rose 9.1 percent to $98.6 billion in its latest fiscal year.

3. Plenty of room to grow internationally

As of April 30, 2009, Wal-Mart is in 14 countries around the word, including Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico, Puerto Rico and the United Kingdom. Even though it was unable to enter Korea or Germany, there are still plenty of countries such as Russia to grow.

4. Bigger is better

Wal-Mart is six times bigger than its closest competitor, Target Corp (TGT), which has a market cap of $30 billion. The third one is Costco Wholesale Corporation (COST) with a $20 billion market cap.

5. Higher profit margin

Wal-Mart saw its profit margin improve by strong sales in higher margin categories. Even though you can’t find Luis Vuitton (LVMHF.PK) bags in Wal-Mart stores, you can certainly buy other brands such as Gucci, which ranks one of the most successful foreign luxury brands in China, according to China Economic Review.

6. Lower finance cost

In today’s low-interest environment, mega companies such as Microsoft Corporation (MSFT), Cisco Systems, Inc. (CSCO) and Wal-Mart could take advantage of lower cost of borrowing. For example, Wal-Mart’s interest charge for the first quarter of fiscal 2010 decreased by 5.8% compared to the first quarter of fiscal 2009. Wal-Mart's management believes that cash flows from operations and proceeds from the sale of commercial paper will be sufficient to finance seasonal buildups in merchandise inventories and meet other cash requirements.

7. Favorable currency exchange

A continuously plunging US dollar may have a favorable impact on Wal-Mart’s international segment's reported sales.

8. Attractive return on investment (ROI)

Wal-Mart’s ROI was 18.7% for the trailing twelve months ended April 30, 2009.

9. Stock buy back

On June 6, the giant retailer announced that it plans to spend $15 billion on share repurchases.

10. “Seal of approval” from Warren Buffett

Warren Buffett owns more than $1 billion of Wal-Mart stock, which represents around 2% of Berkshire Hathaway's (BRK.A) stock portfolio, according to CNBC.

However, as you can see from the chart below, over the last 10 years, Wal-Mart’s stock price was in the range of mid $40s and low $60s. It is not dirt-cheap today, especially with P/E of 15.

In addition, we are not out of recession yet. According to Gillian Tett, associate editor of Financial Times, most of the riskier private equity deals done at the peak of the credit bubble – that is, in the second half of 2006 and first half of 2007 – were refinanced at a late stage in the boom and were often refinanced with few, if any, covenants. Such loans probably will not start coming due until the second half of 2009 or even some time in 2010, but when they do, they will send another shock wave through the systems, which could bring down Wal-Mart’s stock price as well.

As always, you can play with ETFs instead. Consumer Staples Select Sector SPDR (XLP) and Vanguard Consumer Staples ETF (VDC) are the two largest Consumer Staples ETFs. As you can see from the table below, the top 10 holdings for these two ETFs are the same. The beauty is that you can sell one and buy another one immaterially to take stock-loss, thus bypassing the 30-day rule.

Disclosure: I have long position on WMT.

Comments

[Share Investor:]

I like this company for its sheer dominance in just about every retail sector it participates in. Almost a monopoly of sorts..

Jun 09 06:17 AM

[buoy:]

I like walmart, but I think their stock is sort of ho-hum.

Jun 09 09:06 AM

[irish_adam06:]

I agree with the "new normal" - this was no Great Depression, but I do think the consumer will sober up for the next decade or so. The story in Business Week about WMT working towards accommodating the its new middle-class customers made a lot of sense. If the store can keep these new customers when the economy recovers, it will tap into a larger, more consistent (and more willing to buy premium) pool of income-earners.

Growth opportunities in new markets and low cost of financing tell the rest of the story.

Jun 09 11:33 AM

[jozap:]

The new normal: Walmart is upscale shopping.

Nice for Wall Street, not so good for main street.

Jun 09 03:04 PM

[Larry House:]

I agree with the above comments, and I took a position in WMT last week. All things considered, I think WMT makes sense here. The new buy-back plan convinced me. I definitely lean toward the defensive side, even though many are ready to declare total victory over our economic problems. I wish I could believe that, but I can't.

Jun 09 03:33 PM

[banyon:]

Not sure I agree with "favorable currency exchange". Considering that the vast majority of Wal-Mart sales are made in this country and that most of its products are made in China, you would expect the increased strength of the Yuan to cause a general rise in price of Wal-Mart's goods, which is currently one of their largestadvantages over competitors. This phenomenon, because of its scale, I would think would far outstrip the relatively minor gains from international sales.

Otherwise, a good summary of the stock.

Jun 09 08:06 PM

[Mr T:]

Seal of approval from Warren Buffett? And how much dough has he lost over the last year?

Jun 10 08:40 AM

[Graham and ...:]

Dear Dividend Machine:

Mr. Buffett was a "2-20" (0-25, actually) operator in his early, hedge fund days.

But that stopped when he rolled over his Buffett Partnerships into the Berkshire Hathaway Corporation.


On Jun 10 11:44 AM dividendmachine wrote:

> Mr T Buffett has lost money on paper,no doubt
>
> But he is still the only person in HISTORY to earn 100 billion for
> he and his investors
>
> He takes NO stockoptions and a salary around 200K annually
>
> Compare him to the 2/20 operators and those who got massive stock
> options like Ellsion and others
>
> The fact is that if you lose 15 billion and are worth only 40 billion
> you are certainly no imbecile.lol peace

Jun 10 12:23 PM

[madmilker:]

one reason to don't....

tat STAR....Sam Walton didn't put it there....

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!

Aug 23 10:11 PM