A Lot to Like About Wal-Mart

There is a lot to like about Wal-Mart (WMT). It has brilliant defensive characteristics. When the broad markets are bearish, this stock tends to be less bearish at a minimum, with a high probability that the stock will rise as the broad markets fall. As Wal-Mart approaches its bullish valuations it says "sell me and buy cyclical stocks." The other great thing about Wal-Mart is that when it approaches fair and bearish valuations, it says "buy me and sell cyclical stocks." One of these signals helps you preserve wealth and the other helps you create wealth; both very important aspects of investing. You can read more about bearish and fair valuations in addition to other valuation metrics on the WMT valuation report and User Notes on The Quant Report.

There is a lot more to Wal-Mart than its defensive characteristics. Between 1999 and 2008, it had increased earnings at an annual rate of 11.5%. While 2009 has been a hard year, the annualized earnings growth at the end of 2009 is expected to be 10.9%. While the yield is 2% or thereabouts, the annualized dividend growth has been near 20% annualized; this is very strong. The dividend payout ratio is still low which leaves plenty of room for increasing dividends over the next several years. If you invested $100k at average annual prices in 1999, and re-invested dividends, today you would own 2,633 shares with a capital value of $133k and an annual income of $2.8k - better than a kick in the teeth, keeping in mind what the broad markets have done.

The stock is trading cheap vis-à-vis the SP500. The relative PE is down to 0.75, yet on a PE 6 basis it’s not so cheap. The relative PE 6 is 1.27 - that’s not so good as it points to further downside assuming that we are now in a cyclical bull market at the very least. The beta equity over 1999 to 2009 is a low 54.6% which points to the stability in stock prices compared with the SP500. This is consistent with defensive stocks tendency to trade in a narrower band compared with cyclical stocks. The 1999 to 2009 earnings beta is an impressive 19.15%. This is a very low relative earnings volatility measure which reduces long term risk.

Wal-Mart also has an adjusted payout ratio after considering share buy-backs of about 48.5% at median levels. This is good as it indicates a company focused on returning shareholder value. It is even better when you see "when" value is returned. Wal-Mart is amongst the few companies what has bought back shares when the average annual share price was low. This buying support is probably why Wal-Mart rarely ever trades down below fair values towards bear values. Their balance sheet is okay. Debt (including lease obligations) divided by debt plus equity is at 35% which is high in my view – but it is acceptable considering the broad market, the company’s ability to raise finance and the strong and stable operating cash flow.

To summarize, Wal-Mart appears to be a good company, a great defensive selection. So what is the take on valuation? At just over $50, I reckon the share is trading over fair value and at Graham’s intrinsic value. I put the next cycle bear value at just over $37. This is a level I do not expect Wal-Mart to reach as share buyback support will enter long before this stage. I’d be looking to buy into Wal-Mart once its buyback program accelerates. I’d also be looking to buy if the market is at 1120 level which is my expectation of a normalized market valuation (that is when I would get interested in some defense). I would certainly buy if the market so much as dreams of coming to my bull value estimate of 1492 (that is when I would accumulate defensive positions). At present there are better return opportunities amongst the cyclical sectors, but I would certainly look at buying some defense if the stock trades down to $44 and would look at buying further positions if the stock hits $37.

Useful Links:

• The Quant Report
• User Notes
• WMT Report

SP500 As Reported and Operating Earnings Reports - I am tending to follow Operating Earnings report but am willing to switch back to As Reported on the first hint of reversal in economy.

Disclosure: No holdings

Comments

[U338129:]

Your title doesn't match your analysis and price target. "A Lot to Like About Wal-Mart" would suggest that stock provides a good value if it were purchased at this time. However, your price target is $37-$44 which is well below where it's at now and nowhere near what many believe it to be worth. Where do you get $37-$44; how are you justifying that price?

Sep 16 10:31 AM

[Shiv Kapoor:]

my title was wondering about wal-mart actually!


On Sep 16 10:31 AM U338129 wrote:

> Your title doesn't match your analysis and price target. "A Lot to
> Like About Wal-Mart" would suggest that stock provides a good value
> if it were purchased at this time. However, your price target is
> $37-$44 which is well below where it's at now and nowhere near what
> many believe it to be worth. Where do you get $37-$44; how are you
> justifying that price?

Sep 16 11:52 AM

[Shiv Kapoor:]

Please read the valuation report & user notes if you are interested in figuring how I justify the $37 next cycle bear value and $44 values.


On Sep 16 10:31 AM U338129 wrote:

> Your title doesn't match your analysis and price target. "A Lot to
> Like About Wal-Mart" would suggest that stock provides a good value
> if it were purchased at this time. However, your price target is
> $37-$44 which is well below where it's at now and nowhere near what
> many believe it to be worth. Where do you get $37-$44; how are you
> justifying that price?

Sep 16 11:58 AM

[madmilker:]

Check out what Michael Hodges has to say about the $100 trillion shortfall in the American taxpayers Social Security and Medicare funds.

Why tis company moved their Global Procurement Offices to Hong Kong and than to China....you can be assured it wusn't to buy American made. Feel free to read "The Flow of Trade in a Global Economy" by Lance Winslow. There is one quote from his article tat comes in mind. "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."

Also, think for a moment about George Washington....yes the man tat is on the US dollar bill.... "Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution. In his Farewell Address of Sept. 17, 1796, he drew on the results of his varied experience, offering a guide for both present and future. He urged his compatriots to cherish the Union, support the public credit, be alert to the “insidious wiles of foreign influence,” respect the Constitution and the nation’s laws, abide by the results of elections, and eschew political parties of a sectional cast. Asserting that the United States and Europe had different interests, he declared that it “is our true policy to steer clear of permanent alliances with any portion of the foreign world,” trusting to temporary alliances for emergencies. He also warned against indulging in either habitual favoritism or habitual hostility toward particular nations, lest such attitudes should provoke or involve the country in needless wars."

Take the time to read his farewell address after only eight years of serving his country and than ask yourself tis....How do you think George feels being sent overseas in return for all tat foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anythig for the foreigners to buy. Cheap items didn't make tis great union of 57...oops! 50 states the greatest place on the face of tis Earth.....the American worker (union and non-union) did. You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. Tis is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's tat make stuff including the United States of America....tat doesn't produce very many jobs outside of China.

Being an old person myself and knowing how it wus back in the 40's, 50's and 60's in tis union of 50 states....I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches jus maybe one day he will shake mine again.

oh! and tis quote on Wal*Mart's China web page....

"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."

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!

Sep 16 03:53 PM