Wal-Mart: Downgraded To Hold, Growth To Slow In 2013-14

| About: Wal-Mart Stores, (WMT)

We have downgraded Wal-Mart Stores, Inc. (NYSE:WMT) to a Hold, as valuations are appearing more fair at this time. Wal-Mart was one of our favorite stocks at the beginning of the year due to the fact that we believed the company would begin to appeal again to its core customer base, and it was able to do that effectively so far this year. The company's last earnings were, however, a bit below our expectations, and we cut our company estimates for the year. Wal-Mart's margins were going to get hit, as we expected, as the company rolled back prices, but we were expecting a bit more to come in on revenue. We still see some upside in share prices, but we would be more interested in Wal-Mart at $67 or less.

Ticker: Wal-Mart Stores (WMT)

Rating: Downgrade from Buy to Hold

Price Target:

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Wal-Mart actually improved its outlook for the full year, but it also commented that it was rolling back growth in Latin America and China. Still, the company has improved its full year outlook, as its 'frugal customers' have returned. That said, the slowdown in new stores does hurt the company's growth potential in 2013-2014.

The company is definitely concerned. "I don't think the economy is helping us," Charles Holley, Wal-Mart's chief financial officer told reporters during a conference call. "Our customer is still very concerned about employment."


Margins have stayed pretty much the same, with a slight drop in gross margin, and operating margin has dropped a bit from the 2011FY rate at 5.9%. With that said, though, the company is focusing now on improving profitability in emerging markets, while continuing to focus on getting back its 'frugal customers' in the States. If it can get margins back to 5.9% with the growth it has posted this year, we may see our price target increase.


Value is good for Wal-Mart. Like we have noted, we do think Wal-Mart has some more upside in value to growth comparisons, but the company has also increased in price this year rather well. There is still some more room to the upside for 2012, and that can be seen in the sub-15 future PE. As long as profitability margins stay where they are, these PE ratios suggest at least about 11% growth by the end of the year.


Wal-Mart ranked 11th out of 12 in the growth scoring for discount stores in our EquityAnalytics, and that is really not what this business is anymore. The company improved on its growth. It is now a stock that should be bought when there is value, as well as income. At the same time, although the company has seen a resurgence in growth this year, growth is likely to slow in 2013 and 2014 on the slowdown in growth in China and Latin America.

Financial Health:

Wal-Mart's financial health is actually quite weak on metrics, but we would not say that WMT is at any risk. The company, though, based on its low current ratio, is just using a lot of debt to finance its businesses and has seen the accrual of a good deal of liabilities. This is not all bad if a company is expected to grow and be able to have good cash flow - which Wal-Mart does have. All in all, the company is leveraged pretty well right now, so future growth would have to come from more capital expenditure that hurts the bottom line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.