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Using a Value Line Report: Wal-Mart Stores - Testing New Highs and Lows
From an analytical perspective, one can’t say enough about what makes Wal-Mart Stores (WMT - Free Wal-Mart Stock Report) a great company -- financially speaking. The Value Line report offers a wealth of data points and even commentary that highlight the company’s most important attributes. A quick look at the financial barometers in the Statistical Array reveals that the Price/Earnings Ratio, which is about 13 times our forward 12-month earnings-per-share estimate, is below the equity’s historical norms (as of yesterday’s closing price). Moreover, the stock is trading at approximately half of the estimated sales per share for fiscal 2012 (ends January 31, 2013). In addition, despite the company’s hefty debt load, its Financial Strength rating is at the top of the Value Line universe, at A++, which can be justified by its reasonable debt-to-capital ratio (36% as of last 10Q filed on 12/4/12) and solid cash-flow growth (displayed in the Annual Rates Box, Statistical Array, and the cash-flow line in the Graph), not to mention its exemplary score for Earnings Predictability, which is also located in the Financial Strength box. These factors, coupled with a Beta of .60, make WMT one of the highest quality stocks around, further supported by its Safety rank (both Beta and Safety can be found in the Ranks box), which is 1, the Highest bestowed by Value Line.
Taking all the aforementioned qualities into account, considering Wal-Mart’s solid earnings growth over the past five to 10 years, it is a tad puzzling that the stock’s price chart appears to have moved sideways, range-bound and meandering around a mean mid-point of about $52 a share over the past decade. With the exception of a nice run during the recession in 2008, as consumers burdened by tough economic conditions scrambled for value, and investors flocked to less risky options in the market, such as Wal-Mart, the stock had not broken through the $60 resistance level since early 2005. That is, until late 2011, when WMT began an initially bumpy, but fruitful, rally that propelled the stock to an all-time high of $77.60 (split adjusted) in October of 2012. The stock has since fallen prey to profit taking, as investors appear to be cashing in gains ahead of the feared “fiscal cliff”. Indeed, widespread trepidation surrounding the pending expiration of Bush-Era tax cuts continues to permeate the financial markets, demonstrated by the increasing number of accelerated dividend payments, which have been moved up ahead of the January fiscal deadline.
Even with the recent pullback in the stock price, we believe that the common break out factor for these shares is, in fact, adverse economic conditions. We contend that it was the melancholy economic malaise of 2012, undoubtedly a financially somber period in comparison to the post-recession recovery years of 2010 and 2011, which fueled the stock’s ascension. Moreover, as policymakers had yet to reach a meaningful compromise as we went to press, we believe the challenging near-term road ahead for the nation ought to boost WMT’s stock-price momentum. This view is supported in the Analyst Commentary, where Kevin Downing concludes his report by noting that “Timely Wal-Mart stock is a good choice for the short and long term.” Mr. Downing calls attention to the equity’s Timeliness rank of 2, which suggests that the shares will outpace the broader market’s averages in the year ahead. He also points out that the company’s strong earnings-growth prospects over the next 3 to 5 years will probably support above-average capital gains in that span.
On the other hand, as the stock price peaked in 2012, the company’s reputation appeared to suffer. On the heels of an alleged corruption scandal involving officials in Mexico and Wal-Mart’s subsidiary in that country, Wal-Mart de Mexico, the parent has faced mounting criticism and controversy. The rising tide of employee dissatisfaction and labor-law violation claims, and a recently initiated investigation into Wal-Mart’s lobbying activities by the India’s government, which also alleges bribery and corruption involving Wal-Mart corporate representatives and officials in that nation, will likely force the company to reevaluate its corporate culture and social responsibility strategies, or run the risk of more damaging litigation in the future, which could hurt market share and delay expansion efforts.
All told, the stock’s aforementioned softness may continue through the end of the year, but we believe this will provide investors with a decent entry point into a high-quality income-paying offering with well-defined long-term appreciation potential.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.