Owning Wal-Mart: Taking the Vito Corleone Approach

I have to admit, when a firm represents almost 10% of all retail in the US, there is going to be a major spot light on every move the firm makes. Frankly, I need to take the Vito Corleone approach when following Wal-Mart Stores Inc. (NYSE: WMT) meaning “I cannot judge what someone does for a living” as the Don would say, even if it seems predatory.

This week WMT announced that they are predicting that the 2009 holiday season would come late and it would progressively add discounts. It read to me like everyone should wait to shop until 12/18 and then go into a discount feeding frenzy at Wal-Mart.

Let’s face it; Black Friday is a myth in retail, as is Cyber Monday. The real action is back-timed to the schedule of shopper convenience and how the calendar falls.

Is WMT paranoid that this year will be worse than last year? Is there a dire prediction that gift givers will wait to pounce only when prices are lowest?

I believe everyone is cutting back this year. Frugal is the new chic; Target (NYSE: TGT) is hip and Wal-Mart is practical. I think there is a master plan at work and that the timing of this announcement, the amount of media coverage and the mood of the media is all being orchestrated. The media doesn’t see unemployment as a lagging indicator. The media can’t wait for things to play out. The media is almost hoping for a double dip in the market and a second and maybe third Federal stimulus plan.

This plays right into the predatory nature of Wal-Mart. Price the competition out of business. History teaches us this strategy worked in steel, energy, and the railroads in the early 1900s. Wal-Mart is shrewd enough, strong enough and poised to price many weaker retailers out of business. Who does vendor management and pricing better? Who does supply chain management better? Who can still squeeze out a profit and remain standing at the end of this fight? Only Target can hold a candle to Wal-Mart on this one.

Now that is the plan domestically. That is the tip of the iceberg.

This country is near over-stored. Our population is static to shrinking, is aging and we have shut down immigration. Not a great growth scenario for the nation’s largest retailer. The next step for growth is already in place. WMT is already present in the most populated country on earth. Posted on 10/23 on People's Daily Online is Wal-Mart’s next move in China.

Wal-Mart, the world's largest retailer, released an ambitious expansion plan. The company has planned to open 5 branches in Sichuan in 2010 and to establish a logistics center in Chengdu within three years. It will be the fourth logistics center Wal-Mart has established in China.

"We are willing to invest in western China," said Ou Guoming, senior manager of Wal-Mart Regional Office, adding that this decision was based on the significance of the western China market.

In the first half of 2009, western China witnessed 11.8 percent of GDP growth and 19 percent retail sales growth.

This article speaks for itself. Wal-Mart stock was just about tops in 2008 stock performance and so far horrible in 2009. Many investors and analysts have lost interest; especially after WMT discontinued providing guidance making the game far less interesting in their eyes. Fact: Wal-Mart continues to deliver quarter after quarter. The question: will the Street reward the firm and its investors with a fair valuation in terms of its multiple (P/E)? Wake up Wall Street, I am voting yes by holding our shares.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long TGT and WMT.

Comments

[U338129:]

All you can do is continue to buy while the valuations guide you to do so. You see where the growth is, you see what WMT's plan is with the price cuts, and you know the facts about how they continue to produce quarter after quarter. You also know the stock is simply being ignored for now. Seems like a great contrarian move given that everything else worth investing in has already run up (and is too expensive to buy now).

Oct 23 09:31 AM

[User 98009:]

I'm assuming WMT will NOT lower their prices for a long period of time. I don't understand their marketing; because, I thought their recent advertising would drive buyers to their stores, cutting prices will hurt their bottom line more than it will their competitors, I'm sure of that. I'll give them another month to see what the stock price does before I never buy their stock again.

Oct 23 11:39 AM

[Bell:]

WMT is positioned this holiday season to again lead the retail community in sales and profit. WMT has done it's homework in buying their holiday merchandise and will not suffer in gross profit as they continue to lower the retail of their critical holiday items. Their price structure has been determined long before the season starts. I believe the stock is valued low. I see it as a good buy.

Oct 23 12:29 PM

[cyclingscholar:]

You are forgetting that Walmart is square in the eye of the Anointed One, his union and redistributionist hacks, as well as limousine liberals who saunter off to Mall of America while telling us to buy local.

Oct 23 02:54 PM

[U338129:]

Well, if Obama and his socialist party wish to force WMT to take on certain practices then the socialist party will have no choice but to force all retailers to do the same to ensure everybody is on an equal playing field. So, if they want WMT to have unions then all companies (Target, Sears, Best Buy, Costco, etc.) must have unions, they must all have the same health care as WMT, and they must pay the same rage rates as WMT. This must be forced down the throats of not just the large businesses, but the mid and small businesses as well. If that happens, WMT will be even more powerful because it will be the only one that can handle the overhead.


On Oct 23 02:54 PM cyclingscholar wrote:

> You are forgetting that Walmart is square in the eye of the Anointed
> One, his union and redistributionist hacks, as well as limousine
> liberals who saunter off to Mall of America while telling us to buy
> local.

Oct 23 03:14 PM

[U338129:]

Wage, not "rage":) Oops!


On Oct 23 03:14 PM U338129 wrote:

> Well, if Obama and his socialist party wish to force WMT to take
> on certain practices then the socialist party will have no choice
> but to force all retailers to do the same to ensure everybody is
> on an equal playing field. So, if they want WMT to have unions then
> all companies (Target, Sears, Best Buy, Costco, etc.) must have unions,
> they must all have the same health care as WMT, and they must pay
> the same rage rates as WMT. This must be forced down the throats
> of not just the large businesses, but the mid and small businesses
> as well. If that happens, WMT will be even more powerful because
> it will be the only one that can handle the overhead.

Oct 23 03:15 PM

[mbkelly75:]

WMT has a lot going for them - even technically. Earnings can be so messed with that I stopped using even my beloved PEG and started using Price/Sales instead. Anything below 1.0 shows that the stock is undervalued. WMTs P/S Ratio = 0.48 which is outstanding! They have very little debt compared to their size - that is also outstanding. Their dividend is low at 2.2% but the 5 year average growth of that dividend is 16.17% even in these times and they have been increasing it for 33 years now. Insider ownership is high at 43.57% and insiders have been buying all year when it has dropped down into a $49.02-$51.50 range. They are VERY solid financially with an Altman-Z number of 4.6 when anything >3 shows financial strength. If you are looking for a long-term investment rather than a trade - WMT is a good place to look. They are best-of-breed and that is always a good place to be in.

Oct 23 03:51 PM

[BigOlDave:]

Three things worth noting about Wal-Mart (WMT):

(1) S&P gives it 5 stars (“Strong Buy”) with a Target price of $62/share by mid-August 2010. That’s appreciation of over 2%/month, which, added to the current yield of 2.2% gives a return of 27% within the next year. Twenty-two analysts listed by FirstCall have a “Buy” on WMT (7 “Strong Buys), 11 “Buys”, and 4 “Holds”).

(2) At the rate WMT has increased dividends in past, the 2010 quarterly dividend (full year to be announced in the first week of March 2010) may be $0.32. At current prices ($50.44), that’s still only 2.5%. I would expect WMT to lure more institutional ownership (currently 37% of float) by raising the dividend to $.34/quarter, which still would be only 2.7%.

(3) Management has stated that it continues to pursue a strategy of low prices and high value, but has recently stated that WMT will be focusing less on building stores and more on improving net margins. Operating margins are a paltry 5.65% (vs. Sector’s 7.56%), but net margins are 3.42% (vs. Sector’s 2.63%). Part of this is due to addition of grocery departments, which generally have razor thin margins. This also means that prices may not be cut as much, but the other retailers’ net margins will be even further squeezed.

Obviously, I should disclose that I have a relatively large position in WMT. But I’m also a trader: I don’t fall in love with any investment and, if WMT doesn’t perform or if there are better opportunities elsewhere, I’ll not be a long-term holder.

Dave

Oct 24 03:15 PM