Wal-Mart's Best Bargain
The article below came out in Barron's over the weekend. I will probably need to delete it off this site in a week or so as it is copyrighted.
By Robin Goldwyn Blumenthal
Barron’s, 10/8/05
IT WAS A LONG, LONG TIME AGO that shares of Wal-Mart Stores were last this cheap. Newt Gingrich was speaker of the House, most people hadn't heard of the Internet and O.J. Simpson was on trial for murder. Chances are, it'll be quite awhile before they're this cheap again.
At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock's lowest multiple since 1995. And for the first time in practically as long, Wal-Mart's P/E isn't any higher than the broad market's; it has often been about 30% higher.
The world's largest retailer is famous for its "everyday low prices," but investors today may be getting something even better: a once-in-a-decade low price.
While the stock has been sliding for the better part of two years, it could soon get a lift from a variety of forces -- from changes in Wal-Mart's management and merchandise to Americans' renewed zeal for bargains in a time of high gas prices. Just last Thursday, the Bentonville, Ark., behemoth reported that same-store sales climbed 3.8% in September, at the high end of estimates, easing fears about the hurricanes' impact. The news caused Wal-Mart's stock to buck the day's drop in the Dow and climb by 1%.
That may be just the beginning. Citigroup analyst Deborah Weinswig thinks the shares can rise more than 40% over the next year, to $63. Says she: "In an environment like this, with higher gas prices, the idea of a hypermarket where you can do one-stop shopping is a success."
Wal-Mart, and its shares, do face some real challenges. As anyone with a passing familiarity with the company knows, Wal-Mart in recent times has been the subject of almost uniformly bad publicity over labor practices. At the same time, it has been facing cutthroat competition around the world.
But through it all, another story has been quietly playing out: Wal-Mart has actually increased its profitability.
The company's profit margins this year, 3.5%, are higher than the average of the past 10 years, points out Marsh Douthat, an Atlanta money manager who runs Financial/Market Management, which focuses on large-cap companies from a value-oriented, quantitative perspective.
And Wal-Mart has only gotten bigger. With 1,253 Wal-Mart stores, 1,876 Supercenters, 555 Sam's Clubs and 95 Neighborhood Markets (geared to urban areas), as well as more than 1,600 stores internationally, Wal-Mart has more than tripled its revenues in the past 10 years, to an expected $317 billion next year. Despite its sheer size, the company has managed to grow twice as fast as U.S. GDP.
Douthat describes Wal-Mart as "basically a sales- per-share and multiple-expansion story." He notes a projection by Value Line that Wal-Mart's sales per share will rise to $123 annually from $86 over the next three to five years. If profit margins remain roughly at the current 3.5% level, "even if the multiple doesn't do anything the stock will go up 65%," says Douthat.
Then there are stock buybacks, another seldom-noticed piece of the Wal-Mart story. With 4.16 billion shares outstanding, the company has bought back about 320 million shares over the past five years, a trend that could well continue over the next five years. That would only enhance per-share earnings growth, which already is expected to be in the high teens.
"At some point," Douthat quips, "who's left to hate Wal-Mart?"
To some extent, Wal-Mart's shares are caught up in a broad funk for big stocks. Many have been going nowhere for the past several years. But Wal-Mart, unlike many of the others, has kept up its earnings growth, more than doubling profits over that span.
In fact, Wal-Mart has achieved a hefty average return on equity of 22% in the past five years. Moreover, Wal-Mart, in contrast to other large-cap names, is actually underleveraged, with debt of just 14% of enterprise value (market value plus net debt), no unfunded pension liabilities and scant stock-option grants. With the exception of Home Depot, Wal-Mart is among the cheapest of the best-known big-caps, such as Coca-Cola, General Electric and Microsoft.
To bulls, Wal-Mart's stock price is an opportunity not to be missed. They point out that Warren Buffett has stated several times that his worst investment mistake was not buying a full position in Wal-Mart in 1997 -- and the stock was trading at a higher price/earnings multiple then. Some other noted value investors are said to have started buying shares earlier, at prices higher than today's.
Still, there's hardly unanimity on Wal-Mart's prospects. Skeptics argue that it will be difficult for Wal-Mart to continue to expand stores domestically without cannibalizing its existing store base, and that international expansion, which has very low margins, won't be enough to make up the differences.
CEO Lee Scott begs to differ; he has said there's enough demand for about 4,000 additional supercenters in the U.S., including the expansion of 1,200 existing stores. And the overseas push looks to be far more successful than similar forays by other big companies. Wal-Mart's international sales, at $60 billion a year, match the size of Target's whole operation.
While analysts have voiced concerns that high gas prices will crimp consumer spending, that view may prove to be short-sighted. Wal-Mart's customer base could very well widen in tough times, with the stores maintaining their lower-income base and gaining some higher-income consumers who are looking to save some money. The first look at winter heating bills just might convince some Bloomingdale's shoppers that the time has come to step down to Wal-Mart.
Wal-Mart is certainly courting such buyers. It has been trying to spruce up its fashion image, putting the highly regarded John Fleming, who spent 19 years at Target (TGT), in charge of marketing and offering more in the way of higher priced, branded fashions. It has been rumored to be considering buying Tommy Hilfiger (TOM), the upscale clothing brand. It already has started selling such higher-end essentials as 400-thread-count sheets and making the stores more inviting with such touches as faux-wooden floors.
The strategy of bringing in more fashionable products and making the stores more appealing should help to drive up the average ticket and increase the number of sales.
Citigroup's Weinswig says she's heard that Metro 7, a new line of urban apparel for women due to be rolled out in 450 stores this fall, has "blown the doors off" the stores it's been tested in.
Wal-Mart, for its part, has been sending out positive signals about its total sales. CEO Scott told a recent Prudential Equity conference that back-to-school shopping "was just awesome," adding, "I think it sets the tone for what the holidays are going to be like."
Scott has moved aggressively to beef up his management team, creating what Weinswig calls "deep bench." In just the past year, Wal-Mart has hired brand expert Stephen Quinn from Frito-Lay as senior vice president of marketing, and moved Eduardo Castro-Wright, formerly chief operating officer of Wal-Mart's successful Mexican operations, to chief executive of the domestic operations.
Castro-Wright "does a phenomenal job of assessing the markets and making sure you have the right product in the right market," says Weinswig.
Wal-Mart, she predicts, will now spend more time looking at "how every store and every market will be tailored to the local customer."
In another key move, the company recently named its head of domestic operations, Mike Duke, and the head of international operations, John Menzer, as vice chairmen, and swapped their jobs. The appointments have helped take up the slack after Tom Coughlin, the former vice chairman, resigned amid a federal investigation into expense-account fraud.
Meanwhile, Wal-Mart has increased its stake in Japanese retailer Seiyu and taken a 33% interest in Carhco, Central America's largest retailer -- moves that Weinswig says will help move the company toward its goal of generating one-third of earnings growth from international operations.
In all, Weinswig sees a sense of urgency from the CEO, a real focus on expenses, and improved marketing and merchandising.
Her $63 price target is based on an '06 multiple of 20.5. That, in turn, reflects her expectation that the merchandising shifts and 15% to 18% growth in square footage will help drive more consistent same-store sales growth -- in the 3% to 5% range -- and translate into earnings growth of 15% to 18%, as well.
Says investment manager Douthat: "You have to look at these financials and say, who are we to distrust the people who have created this?"
By Robin Goldwyn Blumenthal
Barron’s, 10/8/05
IT WAS A LONG, LONG TIME AGO that shares of Wal-Mart Stores were last this cheap. Newt Gingrich was speaker of the House, most people hadn't heard of the Internet and O.J. Simpson was on trial for murder. Chances are, it'll be quite awhile before they're this cheap again.
At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock's lowest multiple since 1995. And for the first time in practically as long, Wal-Mart's P/E isn't any higher than the broad market's; it has often been about 30% higher.
The world's largest retailer is famous for its "everyday low prices," but investors today may be getting something even better: a once-in-a-decade low price.
While the stock has been sliding for the better part of two years, it could soon get a lift from a variety of forces -- from changes in Wal-Mart's management and merchandise to Americans' renewed zeal for bargains in a time of high gas prices. Just last Thursday, the Bentonville, Ark., behemoth reported that same-store sales climbed 3.8% in September, at the high end of estimates, easing fears about the hurricanes' impact. The news caused Wal-Mart's stock to buck the day's drop in the Dow and climb by 1%.
That may be just the beginning. Citigroup analyst Deborah Weinswig thinks the shares can rise more than 40% over the next year, to $63. Says she: "In an environment like this, with higher gas prices, the idea of a hypermarket where you can do one-stop shopping is a success."
Wal-Mart, and its shares, do face some real challenges. As anyone with a passing familiarity with the company knows, Wal-Mart in recent times has been the subject of almost uniformly bad publicity over labor practices. At the same time, it has been facing cutthroat competition around the world.
But through it all, another story has been quietly playing out: Wal-Mart has actually increased its profitability.
The company's profit margins this year, 3.5%, are higher than the average of the past 10 years, points out Marsh Douthat, an Atlanta money manager who runs Financial/Market Management, which focuses on large-cap companies from a value-oriented, quantitative perspective.
And Wal-Mart has only gotten bigger. With 1,253 Wal-Mart stores, 1,876 Supercenters, 555 Sam's Clubs and 95 Neighborhood Markets (geared to urban areas), as well as more than 1,600 stores internationally, Wal-Mart has more than tripled its revenues in the past 10 years, to an expected $317 billion next year. Despite its sheer size, the company has managed to grow twice as fast as U.S. GDP.
Douthat describes Wal-Mart as "basically a sales- per-share and multiple-expansion story." He notes a projection by Value Line that Wal-Mart's sales per share will rise to $123 annually from $86 over the next three to five years. If profit margins remain roughly at the current 3.5% level, "even if the multiple doesn't do anything the stock will go up 65%," says Douthat.
Then there are stock buybacks, another seldom-noticed piece of the Wal-Mart story. With 4.16 billion shares outstanding, the company has bought back about 320 million shares over the past five years, a trend that could well continue over the next five years. That would only enhance per-share earnings growth, which already is expected to be in the high teens.
"At some point," Douthat quips, "who's left to hate Wal-Mart?"
To some extent, Wal-Mart's shares are caught up in a broad funk for big stocks. Many have been going nowhere for the past several years. But Wal-Mart, unlike many of the others, has kept up its earnings growth, more than doubling profits over that span.
In fact, Wal-Mart has achieved a hefty average return on equity of 22% in the past five years. Moreover, Wal-Mart, in contrast to other large-cap names, is actually underleveraged, with debt of just 14% of enterprise value (market value plus net debt), no unfunded pension liabilities and scant stock-option grants. With the exception of Home Depot, Wal-Mart is among the cheapest of the best-known big-caps, such as Coca-Cola, General Electric and Microsoft.
To bulls, Wal-Mart's stock price is an opportunity not to be missed. They point out that Warren Buffett has stated several times that his worst investment mistake was not buying a full position in Wal-Mart in 1997 -- and the stock was trading at a higher price/earnings multiple then. Some other noted value investors are said to have started buying shares earlier, at prices higher than today's.
Still, there's hardly unanimity on Wal-Mart's prospects. Skeptics argue that it will be difficult for Wal-Mart to continue to expand stores domestically without cannibalizing its existing store base, and that international expansion, which has very low margins, won't be enough to make up the differences.
CEO Lee Scott begs to differ; he has said there's enough demand for about 4,000 additional supercenters in the U.S., including the expansion of 1,200 existing stores. And the overseas push looks to be far more successful than similar forays by other big companies. Wal-Mart's international sales, at $60 billion a year, match the size of Target's whole operation.
While analysts have voiced concerns that high gas prices will crimp consumer spending, that view may prove to be short-sighted. Wal-Mart's customer base could very well widen in tough times, with the stores maintaining their lower-income base and gaining some higher-income consumers who are looking to save some money. The first look at winter heating bills just might convince some Bloomingdale's shoppers that the time has come to step down to Wal-Mart.
Wal-Mart is certainly courting such buyers. It has been trying to spruce up its fashion image, putting the highly regarded John Fleming, who spent 19 years at Target (TGT), in charge of marketing and offering more in the way of higher priced, branded fashions. It has been rumored to be considering buying Tommy Hilfiger (TOM), the upscale clothing brand. It already has started selling such higher-end essentials as 400-thread-count sheets and making the stores more inviting with such touches as faux-wooden floors.
The strategy of bringing in more fashionable products and making the stores more appealing should help to drive up the average ticket and increase the number of sales.
Citigroup's Weinswig says she's heard that Metro 7, a new line of urban apparel for women due to be rolled out in 450 stores this fall, has "blown the doors off" the stores it's been tested in.
Wal-Mart, for its part, has been sending out positive signals about its total sales. CEO Scott told a recent Prudential Equity conference that back-to-school shopping "was just awesome," adding, "I think it sets the tone for what the holidays are going to be like."
Scott has moved aggressively to beef up his management team, creating what Weinswig calls "deep bench." In just the past year, Wal-Mart has hired brand expert Stephen Quinn from Frito-Lay as senior vice president of marketing, and moved Eduardo Castro-Wright, formerly chief operating officer of Wal-Mart's successful Mexican operations, to chief executive of the domestic operations.
Castro-Wright "does a phenomenal job of assessing the markets and making sure you have the right product in the right market," says Weinswig.
Wal-Mart, she predicts, will now spend more time looking at "how every store and every market will be tailored to the local customer."
In another key move, the company recently named its head of domestic operations, Mike Duke, and the head of international operations, John Menzer, as vice chairmen, and swapped their jobs. The appointments have helped take up the slack after Tom Coughlin, the former vice chairman, resigned amid a federal investigation into expense-account fraud.
Meanwhile, Wal-Mart has increased its stake in Japanese retailer Seiyu and taken a 33% interest in Carhco, Central America's largest retailer -- moves that Weinswig says will help move the company toward its goal of generating one-third of earnings growth from international operations.
In all, Weinswig sees a sense of urgency from the CEO, a real focus on expenses, and improved marketing and merchandising.
Her $63 price target is based on an '06 multiple of 20.5. That, in turn, reflects her expectation that the merchandising shifts and 15% to 18% growth in square footage will help drive more consistent same-store sales growth -- in the 3% to 5% range -- and translate into earnings growth of 15% to 18%, as well.
Says investment manager Douthat: "You have to look at these financials and say, who are we to distrust the people who have created this?"
posted by Bobby at 5:41 PM
4 Comments:
Thanks, Lloyd!
This comment has been removed by a blog administrator.
Theirs always some bargains out their.
Great stuff on wallmart
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