Shares of the world's largest retailer, Wal-Mart (WMT), slid nearly 5% Monday following fulminant weekend allegations that the company violated the Foreign Corruption Practices Act in Mexico. This law, passed in 1977, prohibits the use of monetary compensation to foreign officials for business purposes.
This one day explosive move seemed a bit extreme in my opinion. It was the type of sell first find out details later drop that usually precedes opportunity. Not to downplay the incident, but let's face it: in the emerging business world if "you aren't cheating, you aren't trying, and it is only cheating if you get caught."
When I first caught wind of this colossal story brewing during the weekend, I immediately thought of the old cliche "When in Rome." This alleged 'systemic' multi-year bribery of Mexican officials, who oversaw the company's expansion plans, was initially reported by the New York Times and soon spread like wildfire across the business community. It is significant when you realize nearly 1 in 5 of all WMT's stores are in Mexico.
According to the report, citing internal records and emails, Wal-Mart allegedly paid more than $24 million to Mexican officials by distributing envelopes of cash to mayors, city council members, urban planners and bureaucrats who issued permits - anyone who stood in the way of preventing the company from opening new stores.
The time frames of the events reported were from the 1990s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes was to establish as many stores as quickly as possible to limit any attempt at competition. These bribes artificially accelerated growth.
They had zoning maps changed. They made environmental objections vanish. Permits that typically took months to process materialized in days. They were essentially buying time.
The DOJ is reportedly conducting a criminal probe of these allegations. The SEC is investigating as well. On Monday afternoon, Democrats in the House of Representatives said they too would investigate the allegations of bribery by the retailer.
The potential charges against Wal-Mart come at a time when the Justice Department is getting more aggressive in charging top executives in bribery cases.
Nevertheless, I feel investors who are willing to take a long-term approach here can benefit from an artificially depressed share price.
Why do I feel this is a buying opportunity?
- Even though Wal-Mart is the top private employer in Mexico with some 2,100 stores, WMT owns only 69% of the Mexican unit, which trades separately as WMMVY.PK.
- Walmex only accounts for about 8% of the company's overall profit.
- Wal-Mart provides a steady, increasing dividend of over 2.5% annually.
- Wal-Mart has a price-to-earnings ratio substantially less than the industry average at 15.7 and also some of their well known competitors.
- Over the past five years, Wal-Mart has had a higher growth rate than competitors.
- Although online shopping is gaining traction there will always be a market for physically picking up items in real time.
The biggest risk to shareholders is the fact that Wal-Mart could potentially be black-listed from government contracts domestically and its other operations abroad could face intense scrutiny in the coming months. They may also face stiffer penalties because of the attempted internal cover-up of this matter. Competitors and activists will also use this as ammunition against the retail giant. Many investors will wait till the smoke clears to get a better perspective on direction. There was a 3/1 ratio of calls to puts on Monday for WMT. It may not be so far-fetched to think Wal-Mart is going to rally soon.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMT over the next 72 hours.