Wal-Mart: Another 20%-40% Upside in Store

Our value investing methodology has shown Wal-Mart (WMT) to be a very attractive buy candidate for quite some time now. In fact, at the beginning of 2007 we were asked for our top value stock buys by Barron’s and Wal-Mart topped our list. The price has oscillated a bit since then, but we are proud to state that it is up over 20% since our Barron’s pick. Most of that price appreciation has occurred in the last 6 months, but even after the great performance of Wal-Mart stock of late we still think it represents a good value buy for the long term investor.

The retail behemoth has seen its stock rise to a 3 year high and Wal-Mart shows little sign of slowing. It has beaten analyst estimates for each of the last two quarterly results. Furthermore, Wal-Mart raised guidance for first quarter earnings from $.70- $.74 to $.74-$.76. Wal-Mart just broke the $100 billion quarterly revenue for the first time in history. The impressive retail sales growth has been amidst an economic slowdown, and that suggests that as the American economy slows it does not necessarily hurt Wal-Mart.

Wal-Mart is known to be the “low price leader” and consumers are looking for bargains now more than ever as they experience rapidly declining home values and higher unemployment factors. Wal-Mart is a one-stop shop and people will likely flock to Wal-Mart for basic needs versus the more-pricey specialty retailers. As an example, Wal-Mart sells more groceries than any other retailer. They sell things that people need, at a more affordable price, and brought to the consumer with great convenience. It is the juggernaut of retail and we see few that could challenge their dominance.

International expansion has been just as impressive, as growth in Latin America and Asia has taken off. The company expects to see continued rapid growth in the emerging markets of China, Brazil, Canada, and the United Kingdom. The company on Monday named a seasoned German retailer, Stephen Fanderl, as the new President of Wal-Mart Emerging Markets- East. Fanderl has been asked to “explore retail business opportunities in Russia and neighboring markets.” Russia could be a slight risk, but the size of that potential market makes it worth taking. At the current pace, it seems that there may be a Wal-Mart store in every corner of the world.

With all of the success that Wal-Mart is enjoying right now, it is amazing that it is still so undervalued by our methodology. We have calculated Wal-Mart’s normal range historically for price-to-cash flow as 13.02 to 17.45, and the current level is 10.81. Price-to-sales is similarly undervalued as the normal range is .643 to .86, currently .538. The value of the company is unmistakable and the macroeconomic trends seem to be aligning in Wal-Mart’s favor. Therefore, the Ockham Research rationally expected price target is between $66 and $77.

Disclosure: None

Comments

[jerico]

Great article. Wal-Mart has begun building Supercenters in Mich, Minn, and Ill in the suburbs at a quick pace recently. This previously union store-dominated areas are new and fertile turf. With union-store prices significantly higher for food, the Supercenters will do tremendous volumes, especially now. The diversity of Wal-Mart's International divisions allow for riding out economic swings, and new formats in the U.S. will allow for continued domestic growth. Next year, Wal-Mart will exceed 400 billion in gross sales, in 3 years, probably a half Trillion dollars in annual sales. That kind of cash flow can soak up a lot of little problems without significant negative impact to profits.

[Ker]

Thats just excellent opportunity for today!
Did someone estimate earnings for Q1 2008 ?

[Nick1]

This article is mostly a crock as many studies have shown the over-all savings at walmart is only 3% and that does not factor in the taxpayer subsidies you give them. Hardly worth going to a dirty crime center for a miserable less than 3%

[SageNot]

List those bogus study links USER, or is it in your dreams? Where do you live "crime free," in Utopia?

[tessant]

66-77 would be great!
my grandmother gave me some shares before she died, and its been stock in the 40-52 range for years. so excited to see this moving!!

-scott
marketbar

[crowdofcheerleaders]

something definitely smells rotten in this rosy picture. there are waay to many variables in play to simply proclaim WM The Great Victor Now And Forever. to be that awesome, WM would have to get govt agreements and entitlements to ensure that they are the only game in town in the future. i wouldn't put it past them, though :o

[Ker]

I did some research on the subject the fundamentals are correct, so definitely bull market.
I think today's rise of $1.00 was from speculators reading this list and I am one of them with profits today!

[DeaverB]

Some of the criticism of Walmart in these comments is deserved. We find the Dollar Stores in the US adopting the "old" low price WMT approach. They are growing much faster. The real play is WMT International--they have a huge future. Once they realize they should cool it in the US, go back to low prices, make Americans happy, and put their $ overseas, they'll be unstoppable.

Will they? Is that too simple? Stop making people mad (just read some of the above comments)--then grow elsewhere....

[Tao]

When people want to get mad, they will find a reason, even if they have to manufacture one. They criticise Wal-Mart for selling cheap stuff. Did anyone notice, they sell the exact same toys at Toys R Us?During the paint recall, they both had to recall the same Chinese made toys.

Walmart has alway done this, they go for years without going up, but when they do they go up a lot.

[delta 7777]

any thoughts with respect forseeable higher Walmart supply costs due to declining dollar??

[firboy4]

I'm looking at what Walmart is doing around the world, not what they are doing in the U.S. Buying stocks is not a moral issue, unless the amount I own can change Walmart policy. The way I see it, Walmart is a well run company, with it's fiingers in China and many other countries and this will save it when the U.S. doesn't have any more money.

[Moby Waller]

WMT has had a very nice technical breakout from a 3 year trading range as well, I'm preparing a report on that which will probably not be out til Monday, should be available on this site.

[Chungst]

WMT is benefitting from massive price inflation in the products they stocks. A number of the food items went up about 25% in about one month based on my ongoing trips to WMT. I even confirmed this with a number of the employees.

This is clearly inflation driving the margins and earnings and I don't believe this type of inflation-based gains are sustainable.

[madmilker]

well.....if the company supported America like they support China maybe that would all be so........but QUOTE***In China, as elsewhere, we follow the Wal-Mart tradition of building our business one store and one customer at a time. We strive to provide our customers with friendly service and a wide selection of quality products at Every Day Low Prices. With each Wal-Mart store we bring advanced retail know-how to the local market. By fostering a healthy, competitive environment, we hope to constantly improve our business operations and customer service in order to contribute to the prosperity of the local economy.

Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. At Wal-Mart, we always work with our suppliers to grow together. In August 2007, Wal-Mart once again secured the top spot of the 2007 Supplier Satisfaction Survey conducted by Business Information of Shanghai. Additionally, Wal-Mart directly exports about US$9 billion from China every year. The export volume by third party suppliers is also estimated to be over US$9 billion.***end quote......and having Germany and South Korea kick their a!! out and the nice people of Japan not getting into Seiyu....duh! add to that the yuan value going up with the US dollar falling and the people of the World can't figure out why anything is going "UP".....maybe when they find the person that took the "hyphen" from the name and replaced it with a big single "star" that person will be glad to answer the question....are will they.