Why The Sell-Off In Wal-Mart Is Overdone

| About: Wal-Mart Stores, (WMT)

By Joseph Hogue CFA

Wal-Mart Stores (NYSE:WMT) was down 4.6% on Monday after the company has come under investigation under the Foreign Corrupt Practices Act (OTCPK:FCPA) for alleged bribery at its Mexican affiliate. Wal-Mart sent investigators to Mexico City in 2005 when a company lawyer was tipped off to possible bribery by a Wal-Mart de Mexico executive to speed up store openings in the country.

The company found suspected payments of more than $24 million but then shut down the investigation and failed to notify either Mexican or U.S. officials. While the story looks bad, and will possibly result in criminal charges and hefty fines, the market may be overreacting.

The 4.6% drop in shares effectively erased up to $9.9 billion dollars of market value from the company. Looking at prior precedent in FCPA cases and settlements, this is well over what the company would be expected to pay. Even with a possible slowdown in expansion and the bad publicity, it is doubtful that Wal-Mart should be valued at almost ten billion dollars less.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977 is a federal law primarily used to prosecute accounting transparency requirements under the SEC and bribery of foreign officials. Any U.S. or foreign corporation that has registered securities with the SEC can be prosecuted under the act. The Department of Justice (DOJ) boasts that 32 cases were prosecuted in 2010.

Legal precedents

Though it is hard to estimate the final price effect on the stock from a settlement with the SEC and the Department of Justice, previous precedents can help put a range on possible settlement expenses. The online blog of the FCPA lists the top ten settlements under the act and details for each.

These range from $800 million for Siemens (SI) in 2008 to $48.1 million for Royal Dutch Shell (NYSE:RDS.A) in 2010. Most of these settlements include a large criminal fine along with a civil disgorgement of profits.

A more appropriate precedent may be available through the Armor Holdings settlement last year. The company was accused under both the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act for setting up a sham consulting agreement with a 3rd party to bribe a U.N. official.

The company cooperated with DOJ and SEC investigators and was able to reach a non-prosecution agreement for $5.7 million. This amount pales in comparison to some of the larger settlements, especially those including criminal fines, but reflects the level of cooperation involved in the case.

While the bribery charges are certainly welcomed by both activists and competitors, it will not slow the world's largest retailer from global expansion. Shares currently trade for just over 13.0 times trailing earnings and pay a healthy 2.5% dividend yield. Even with Monday's dip, the stock is up about 11.4% over the past twelve months and just over 23.0% from lows hit last September.