Wal-Mart's Mistakes Are Fixable - This Stock's Cheap

| About: Wal-Mart Stores, (WMT)

Wal-Mart’s stock (NYSE:WMT) fell slightly during the month of May and is at the same level first reached eight years ago, as the business continues to struggle amidst weak sales. In fact, Wal-Mart’s U.S. same- store sales, at 3%, were the lowest in 26 years in both 2005 and 2006.

The poor results are due in part to external factors such as weakness in the housing market and high gas prices, which have hit Wal-Mart’s low- and moderate-income customers particularly hard, but the company’s problems are deeper.

It has made many mistakes – but, fortunately, ones that are fixable we think, which is why we remain enthusiastic about the stock. We believe earnings per share have to potential to grow at a high single digit or low double digit rate and, at 16x this year’s earnings estimates and only 14.5x next year’s, there’s also room for multiple expansion.

We were quoted in this MarketWatch article saying that we’ve seen this story before: it reminds us of McDonald’s 4 1⁄2 years ago, when it, too, was everyone’s favorite whipping boy, responsible for the obesity epidemic, etc. McDonald has engineered a remarkable turnaround thanks to slowing down growth, reinvesting in its stores, focusing on delivering better products and service to customers, improving its corporate image, spinning off ancillary businesses, rationalizing its international operations and returning capital to shareholders – all of which Wal- Mart can and should do.

Our conclusion in the MarketWatch article was: “Stop pretending you’re a high-growth growth business...You’re a slow-growth business. But a slow-growth business, managed properly, producing unbelievable amounts of capital and returning capital to shareholders can be a home-run investment.”

Wal-Mart is taking steps in the right direction – for example, we were delighted by its announcement at its annual meeting last week that it will open 30% fewer supercenters than originally planned this year and will repurchase up to 8% of the company’s stock via a new $15 billion share repurchase program – but it takes time for change to happen and then become apparent at such an enormous company.

Full disclosure: Long WMT

WMT 1-yr chart:

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