Wal-Mart: A Stable Stock To Buy In A Scared Market

Jun.14.12 | About: Wal-Mart Stores, (WMT)

By Darnell Brown

Although Wal-Mart (NYSE:WMT) has international operations, it does the majority of its business in the United States. Wal-Mart has two major United States business divisions - Wal-Mart US and Sam's Club, which is owned by Wal-Mart.

Wal-Mart stores and Sam's Club have been successful for three primary reasons: (1) both businesses offer a variety of products at discounted prices, (2) both businesses benefit because of their ability to buy inventory in bulk, and thereby command lower prices, and (3) both businesses benefit from the use of their high tech inventory system.

Wal-Mart's technology, extensively track and controls inventory, and its "just in time" inventory concept allows each store to order only what it needs and thereby get fast delivery of the items, which "has the effect of lowering inventory for Wal-Mart, by passing the costs of holding lots of inventory back to its suppliers."

In recent years, Wal-Mart has benefited from the global recession, which has served to attract price-conscious shoppers to their stores. Since 2008, Wal-Mart's revenues have increased by 19.4%, and its net income has increased by 27.9%. While that kind of growth cannot be considered explosive, it is impressive for a retail company that is as big as Wal-Mart.

In mid-May, Wal-Mart reported first quarter earnings for the period ending on April 30th. During the first quarter, Wal-Mart had earnings per share of $1.09, which was an 11% increase from earnings per share of $0.98 in the first quarter of 2012. First quarter revenues were $113 billion, which was an 8.6% increase from revenues of $104 billion in the first quarter of 2012. First quarter net income was $3.7 billion, which was an 8% increase from net income of $3.4 billion in the first quarter of 2012.

Most investors would consider Wal-Mart's first quarter earnings results to be impressive. The company's earnings per share of $1.09, beat consensus estimates of $1.04. Wal-Mart also increased both domestic and international sales in the first quarter. According to the company, "Net sales were up 8.6% to $112.3 billion, with the main domestic retailing arm Wal-Mart US contributing $66.3 billion (up 5.9%) and the international arm adding $32 billion, up 15%. The Sam's Club membership sales outlets added $13.9 billion."

In the first quarter earnings call Wal-Mart's President and CEO Mike Duke was pleased with the success of the company's business model and said: "We believe that the momentum throughout our business positions us very well for the rest of the year." Referring to the international business, he said, "Wal-Mart International delivered strong sales growth in the first quarter, and operating income grew faster than sales." Wal-Mart's Sam's Club division reported first quarter sales of $112.2 billion, which was a 8.6% increase from the first quarter of 2012. Investors reacted to Wal-Mart's first quarter earnings by pushing the stock price 10% higher since the earnings report.

William S. Simon, chief executive of Wal-Mart's U.S. division explained the company's first quart resurgence by saying, "We lower our costs in order to lower our prices so we can give customers a great assortment at the lowest prices. It's a fairly simple concept, but one that's critically important to our customers, particularly in challenging economic times." Wal-Mart needs to continue applying the concepts that it used in the first quarter, because it has been struggling for market share against competitors in a variety of different retail sectors.

Positives for Wal-Mart moving forward

Wal-Mart's earnings are trending upward. In the first quarter, Wal-Mart increased earnings in each of its three major divisions.

"Walmart Express", which is a pilot program of small-sized stores, has experienced good results. Executives say the stores are showing profits and the company could roll out hundreds more in the near future. Designed to catch spur-of-the-moment shoppers and small enough to tuck into tight spaces, Walmart Express stores could pose a threat to Walgreen (WAG), CVS (NYSE:CVS), and Rite Aid (NYSE:RAD) in the future.

In the first quarter, Wal-Mart increased its dividend by 9% to $1.59 per share. It was the 38th consecutive year in which Wal-Mart has increased its dividend.

Negatives for Wal-Mart moving forward

Wal-Mart faces strong competition in each of its three main retail sectors. In the discount retail sector, it competes against Target (NYSE:TGT), Sears Holding (NASDAQ:SHLD) and Dollar Tree (NASDAQ:DLTR). In the retail grocery sector, it competes against the likes of Kroger (NYSE:KR) and Supervalu Inc. (NYSE:SVU), and in the pharmaceutical sector, it competes against Walgreen and CVS.

Wal-Mart must deal with a controversy that "erupted after a New York Times report in April alleged that company officials routinely engaged in bribery in its Mexico operations to smooth the way for its expansion." In the first quarter earnings call, the company warned that their investigation of the bribery allegations could lead to "a variety of negative consequences."

Conclusion

Wal-Mart is a slow growth company in a slow growth industry. Consequently, investors looking for rapid earnings growth and explosive stock appreciation may shun Wal-Mart. However, investors looking for a stake in the retail sales industry will be attracted to Wal-Mart.

The company's earnings and stock price are relatively safe, and it pays a growing dividend with a respectable 2.4% yield. In addition, the stock price is up by 18% over the last 52 weeks, and on May 25th, the stock hit a ten-year high. I like Wal-Mart's diversity and consistency, and consider it to be the top long-term stock pick in the retail sales industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.