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In the financial world, individual investors must wonder why people like Warren Buffett, Anthony Bozza and Boykin Curry continue to handle portfolios that suffer a decline in sales. Would it not be better to dispense with such stocks?

Much as a tennis player can lose a point with a tame shot, a hedge fund manager has to invest in stocks that suffer temporary problems. While most hedge fund managers continue to hold Apple (AAPL) and Google (GOOG), there are stocks that have not performed as well but deserve to be held on a long-term basis. One such stock is Wal-Mart (WMT). Currently held by managers like Buffet, Bozza, Curry and Michael Larson, Wal-Mart has been a solid investment over the past twelve months, returning a dividend yield of 2.5%. However, it suffered a sales decline of 0.03% at the company's main chain in the second quarter. Wall Street analysts were disappointed because they were expecting a 1 percent gain. But this does not justify abandoning the stock.

Financials

In the last quarter, Wal-Mart segments that witnessed growth sequentially were health and wellness, hom, and apparel. Electronics and entertainment delivered similar improvements quarter-on-quarter. eCommerce sales were up over 30% year-on-year.

Wal-Mart grew its net income to $4.07 billion, a 1% increase compared to the same period the year prior. The company's net sales rose 2.4% year-on-year to $116.2 billion. The company reported adjusted EPS of $1.25, in-line with analyst estimates of $1.25. Revenues for the quarter came in at $116.2 billion versus the consensus estimate of $118.57 billion. Consolidated operating income was $6.8 billion, an increase of 1.4% over last year. The company's U.S. business grew operating income by 5.2%. Sam's Club grew operating income by 8.0%. Diluted earnings per share attributable to Wal-Mart were $1.24, a 5.1% increase, compared to $1.18 last year.

Valuation

Wal-Mart's dividend yield outpaces the retail industry average of 2.2%, the sector average of 1.75, and a peer like Costco (COST) with 1.10%. Only Target (TGT) among its peers has a similar dividend yield of 2.50%.

Wal-Mart with a beta of 0.29 is less risky than its competitors. Costco at 0.49 and Target at 0.49 are valued as more risky. Wal-Mart has grown its EPS by 10.49% each year for the past five years. The company saw increases in profitability via higher than-expected consumer spending in addition to modest gains in same-stores sales.

Profit margins are at 3.61%. None of its competitors mentioned here has seen a similar margin. Costco (1.94%) and Target (3.38%) have seen lower operating efficiency in the past year. Wal-Mart's return on equity is 23.45%, higher than 17.30% for Costco, 17.29% for Target, and 20.5% for the industry average. At a return on asset of 8.81%, it is more attractive than Target (7.60%) and Costco (6.59%).

Despite its impressive multiples, shares of Wal-Mart still appear cheap at the moment, as they sport a price to earnings ratio of 14.26, below the industry average of 18.1 and sector average of 29.94. Looking forward, Wal-Mart's forward P/E of 12.74 is attractive, especially when compared with 22.39 for Costco. Now, Target (12.58) is cheaper according to forward P/E, but it is important to note that Wal-Mart dominates it in terms of dividend yields, so this differential is to be expected.

On the sell-side, analysts forecast Wal-Mart to grow its EPS to 5.75 next year, above Target (5.40) and Costco (5.04). In fact, when using the EPS metric, we can see that investors should give Wal-Mart the earnings premium it deserves as its EPS of 5.14 is above 4.62 for Costco and 4.26 for Target.

Analysts and Insiders

Analysts and insiders agree that there are gains to be had in the company. UBS recently initiated a buy rating for the company. Jefferies maintained a buy rating, highlighting positive category comps. Insider purchases in the past few years have been 15, compared to insider sales of 4. Purchasers include directors such as James Breyer and Susan Mary Chambers.

Macroeconomic Environment

From a growth perspective, the retail industry has a sales turnover that is more than 12% of the total trade volume of all US-based businesses. NRF forecasts a 3.4% increase in retail sales for 2013.

Conclusion

When it concerns companies like Wal-Mart, investors need to consider that current and past earnings figures provide information to make a solid investment decision. Value investors should assess the metrics before taking a position on a forward looking basis.

Source: Is Wal-Mart A Good Buy After Its Earnings Report?