WalMart has increased book value per share every year for 10 years, including the recession year of 2001. At the end of 2000, Wal-Mart's book value was $5.80, with the share price hovering in the $50 range. Now, with book value at a much higher $11.67, the stock price is lower, at $45. Wal-Mart's average price-to-earnings ratio in the past 10 years was in the 30s. Now, shares are at their lowest multiple-to-cash flows since the 1970s, at 17.
I expect that margins will widen due to increased sales leverage, improved product mix with an increased focus on higher price points and private label offerings, and savings generated from global procurement efforts. Investors should see these benefits offsetting increases from higher health care, labor and maintenance costs, and fuel and utility expenses. Interest expense should rise significantly, reflecting higher interest rates and acquisitions. YTD through August 17, the S&P HyperMarkets & Super Centers Index declined by approximately 2.0% vs. a 2.7% rise in the S&P 1500 Index. I believe retailers, with strong balance sheets, aggressive new store expansion programs, and an attractive mix of consumables and basic merchandise will benefit from improved merchandising and expected moderate economic growth in 06. With the economy slowing down, discretionary spending remains sluggish due to high gas prices. People will once again resort to affordability and one-stop shopping convenience of hypermarkets and super centers. All this bodes well for Wal-Mart.
Disclosure: I do not own Wal-Mart