It's easy to see why some investors might be put off by Wal-Mart's share performance over the last year. The stock has barely budged, advancing just 3.3 percent while the average stock-price gain in the department and discount retail industry has been more than 13 percent. Wal-Mart's revenue and earnings growth have also lagged the industry average over the trailing 12-month [TTM] period, as indicated below.
Against the backdrop of these lagging conditions, it should be no surprise that Wal-Mart is priced at a discount to the industry averages using several key valuation metrics such as price to earnings [P/E] and P/Sales.
Although Wal-Mart has faced some growth difficulties over the last year, it has managed to provide investors with industry-leading rates of return. For example, both return on investment [ROI] and return on equity [ROE] surpassed the industry norm in the TTM time frame.
In a recent Reuters poll, 22 analysts provided earnings per share [EPS] estimates for Wal-Mart. Prior to the Goldman report, on average, these analysts expected EPS of $2.88 for the fiscal year ending January 2007, and $3.23 for fiscal 2008. This marks a slight upward revision from the consensus readings of $2.86 and $3.21 from a month ago. In Monday's report, Goldman lowered its already-below-average estimate for the year to January 2008 from $3.14 to $3.10. Yet, Goldman also pointed to potential for well-received management and strategy changes along with inventory productivity improvement among factors that could drive performance going forward. On average, analysts in a Reuters poll believe that Wal-Mart can post long-term EPS growth of 13 percent.
Our back-of-the-envelope analysis, which takes into consideration Wal-Mart's historical revenue and EPS growth rates, along with management effectiveness ratios and analyst estimates, suggests that the retailer's EPS can grow at a pace of about 12 percent. That easily eclipses the 9.7 percent annual pace for EPS growth our analysis suggests is needed to justify the current share price.
Disclosure: At the time of publication, Erik Dellith owned shares of GS. He did not directly own shares of WMT, though he may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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