Wal-Mart WMT stock report

Gathered around a conference room, I asked my fellow portfolio managers what company could we invest in, that has cheep products and will benefit from a possible thrifty Christmas season. They all answered quickly Wal-Mart. When I asked the question I did not have a particular company in mind but was thinking in general, a consumer staples company. The answer seemed obvious and I believe is obvious, so putting aside any prior biases against the worlds’ largest retailer, I plan to explain why Wal-Mart should be at the top of your investing list this Christmas season.

Wal-Mart Current Price 49.57

52 Week Range 46.25-59.23

Morningstar’s fair value estimate 60 “Their uncertainty of estimate is low”
Consider buying 48 Consider selling 75

Morningstar Gives WMT a 4/5 star rating

My valuation using current valuation ratios and setting them = to 5 year average ratios and then adjusting the stock price

P/E = 14.48 vs. 5 year average 17.9 stock price = 59.97
P/S = 0.5 vs. 0.6, stock price = 59.48
P/B = 2.9 vs. 3.7, stock price = 63.24
Forward P/E = 12.7 vs 5 year average P/E 17.9 stock price = 69.87 “Growth = 11%.”

The average = $63.14

Future Outlook.

Many skeptics of Wal-Mart believe consumers will soon begin trading up for higher quality higher cost items, hurting WMT’s revenue. The problem with this claim is; the Congressional Budget Office anticipates unemployment to continue to rise through 2010 and estimate hiring will lag behind the economic recovery. The CBO estimate puts the US above 9% unemployment through 2011. With high unemployment many Americans will continue to be thrifty which does not hurt WMT’s sales because of their Staple products. Coming out of the recession, I believe many consumers will stay faithful to the large retailer, which they became comfortable with through hard times and continue shopping at Wal-Mart opposed to switching to higher cost items at other retailers or grocers.

WMT is continually opening new stores in the US and across the world; there are currently 3,859 stores outside the US and 4200 in the US. Some risks involved with the large foreign markets are exchange rate risks, but this could also be an opportunity due to the weakening US dollar.

Other risks would include organized labor or lawsuits against the retailer. Wal-Mart thus far has avoided its’ employees coming together and organizing, but I feel Wal-Mart’s employees know that their competitive advantage comes from low cost items, and the union could have a significant impact on the low cost structure. Wal-Mart has faced various lawsuits for gender and race discrimination, but these lawsuits may have been the result of poor statistical management rather than actual discrimination.

After reviewing Wal-Mart’s valuations according to my estimate and Morningstar’s estimate the company is undervalued. Morningstar’s estimate is 60 and mine is 63. If Wal–Mart was bought at its’ current price of 49.57 and the stock reaches its’ fair value estimate the return would be 17.38% not including a dividend yield of 2.20%.