Will Wal-Mart Growth Plans Move the Stock?

Walmart (WMT) announced plans to accelerate growth with investments in emerging markets. Will they deliver shareholder value in the process?

Walmart already has a significant presence in international markets. As of September 30, 2009 Walmart had 4,300 stores in the United States. International units totaled 3,859 or 47% of stores.

“We’re stepping up growth in our international operations to take advantage of growing economies and opportunities in emerging markets, such as China and Brazil,” said CFO Tom Schoewe.

The company expects 1% to 2% growth this year. Next year is expected to increase to 4% to 6%, inline with historical revenue growth levels.

In the long-run earnings and prices are highly correlated. Just look at a long-term chart of the S&P500 and the corresponding earnings chart. The market tends to over shoot the up and down swings in the short term but over time earnings always drive the price in a regression to the mean.

Walmart has consistently grown revenues and profits for the last decade but the market has taken this growth and continued to lower the multiple on earnings. Market saturation of stores in the U.S. has led many to stay away from the stock but WMT may be worth a second look with the focus on international markets and their urban strategy.

The chart below shows the market cap and EPS for the last decade.

The chart below shows the declining multiple the market is giving WMT over time.

Walmart has grown revenues from $40 billion a quarter in 1999 to over $100 billion a quarter currently but the market cap decreased from $250 billion to $194 billion during this massive growth.

Analysts have been hyping Amazon.com (AMZN) recently on the notion that they are taking share as everyone goes online to buy goods that are traditionally sold at Walmart and Target (TGT). It does appear that Target is losing the online battle but Walmart is not losing share to Amazon based on Compete.com metrics. Amazon is bigger online but the YoY change in traffic is +23% for Amazon.com and Walmart.com.

Also, keep in mind the relative size of the firms. See below the revenue for Amazon.com, Walmart and Target.

The market has discounted Walmart over the last decade. With an attractive dividend yield over 2%, earning yield near 7% and consistent growth and profit margins we would be a buyer of WMT on any major market pull backs. Our proprietary models value WMT in the $59 to $65 range. We would be an aggressive buyer in the mid 40’s.

Disclosure: No Position

Comments

[U338129:]

No.

Nov 03 11:45 AM

[mbkelly75:]

The writer has it right as far as I am concerned. WMT is a great stock over the long-term and if you can get it on a pullback where the dividend becomes 3% ($36.34) or more - lock that in ASAP. In fact, since they have been raising their dividend for 33 years and have a 5 year average of growing that dividend by 16.17% annually - even a 2.5% yield ($43.60) would likely be a good deal over the long term. Now, I will grant you that their Total Growth over the last 5 years (0.33%) is dismal, but the last 3 years Total Growth (9.95%) is much improved - even through this tough market. Had you bought them a few years ago, and re-invested the dividends to lower your cost-basis and increase your income from them - you would be doing fine today. I will buy them when I see a pullback. Right now I am putting more money into MCD. I love that company.

Nov 03 01:58 PM

[mbkelly75:]

One more important thing to keep in mind about WMT. With their Price/Sales Ratio @ 0.48 - they may actually be undervalued right now as <1 is a good indicator of that.

Nov 03 02:06 PM

[U338129:]

I think the problem with WMT revolves around opportunity costs of owning/buying it right now versus what you can get on the market. Even with the run-up since March (which was way oversold to begin with), there is still value in other great companies that have higher dividend yields and which have roughly the same/steady growth opportunities as WMT.

For instance, I'm still buying KO/PEP on the dips and will continue to do so. It's much easier for KO/PEP to increase earnings over time than it is for WMT. Raise the price of soda $0.01 and the companies both make millions of dollars more per day; that's just sick. Oh, and Pepsico, please buy Pringles from PG. Add that to Frito Lay and you have a pseudo-monopoly in that arena...PEP shareholders can only dream:)

Nov 03 03:25 PM

[mbkelly75:]

Actually, I agree with you in principal. I am a long-term holder of KO/PEP/MCD and they are all terrific stocks over the long-term. HOWEVER, P/S <1 shows that a stock might be undervalued. On a P/S basis, KO = 4.07, PEP = 2.22, MCD = 2.89, and WMT = 0.48. This is a very clear difference between them and worth taking notice of. Buying WMT on a pullback into the 40's could be a very good idea over the long-term. I just put cash into LINE, an outstanding MLP with a great dividend that is going X-DIV tomorrow. They seem to be hugely undervalued and this is a great time to buy. Later on this month, I will buy more MCD before they go X-DIV as they are also a great stock.


On Nov 03 03:25 PM U338129 wrote:

> I think the problem with WMT revolves around opportunity costs of
> owning/buying it right now versus what you can get on the market.
> Even with the run-up since March (which was way oversold to begin
> with), there is still value in other great companies that have higher
> dividend yields and which have roughly the same/steady growth opportunities
> as WMT.
>
> For instance, I'm still buying KO/PEP on the dips and will continue
> to do so. It's much easier for KO/PEP to increase earnings over
> time than it is for WMT. Raise the price of soda $0.01 and the companies
> both make millions of dollars more per day; that's just sick. Oh,
> and Pepsico, please buy Pringles from PG. Add that to Frito Lay
> and you have a pseudo-monopoly in that arena...PEP shareholders can
> only dream:)

Nov 03 03:44 PM

[brpinion:]

Even better way to buy WMT is to sell mid 40's puts. I have been doing this for the last year and keep collecting the money. If it ever drops below 45 i am a happy owner of the stock.

Nov 03 11:35 PM

[madmilker:]

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.

Also....think about those 15 cargo ships tat carry 15,000 containers on each tat pollute as much as 760 MILLION AUTOMOBILES...and the $9 BILLION in HIDDEN TAXES tat all American taxpayers have to pay to clean the fish out of ballast tanks of ships.

CHEAP ain't CHIC....and it cost America jobs!

Nov 04 09:11 AM

[mbkelly75:]

That is one of the best use of options that I am familiar with - to get paid to buy a stock at the price you want it for. Your use of puts for this purpose is an outstanding example. Thank you for adding the idea to this conversation.


On Nov 03 11:35 PM brpinion wrote:

> Even better way to buy WMT is to sell mid 40's puts. I have been
> doing this for the last year and keep collecting the money. If it
> ever drops below 45 i am a happy owner of the stock.

Nov 04 09:32 AM