The bid by Wal-Mart Stores (WMT, news) to lower prices during the holiday season led to quarterly financial results that trailed expectations.
At today's close, shares of the world's largest retailer had fallen nearly 6.5% from the Feb. 17 closing price, which set a three-year high for the stock.
But the world's largest retailer still offers patient investors a bargain.
On Tuesday, Wal-Mart reported a 15% drop in net income for the quarter ended Jan. 31 to $5.16 billion, or $1.50 a share. Excluding one-time items, operating profit totaled $1.44 a share, missing the street's consensus of $1.45 a share. And revenue fell short of expectations as well.
The problem: While efforts to woo back shoppers from dollar stores succeeded in bringing in more customers during the crucial holiday season, those customers didn't spend as much as investors had hoped. Margins fell and profits got squeezed.
But Wal-Mart, which pays out a 2.3% dividend yield, continues to travel in the right direction. Sales at its U.S. stores open for at least a year rose for the second-consecutive quarter. International sales continue to grow rapidly.
And in the meantime, Wal-Mart continues to generate cash, which is funding share buybacks and generous dividend hikes.
"While WMT's overall EPS miss may disappoint some investors, we believe the continued momentum (especially in its Wal-Mart U.S. business) demonstrates that the company's initiatives are gaining traction," wrote Citigroup analyst Deborah Weinswig in a research note published Tuesday morning.
Or as David Abella, manager of the Rochdale Dividend & Income (RIMHX) fund puts it, "It's a slow block and tackle story. But it was not enough given how the stock has run up in the last year. . . . Looking ahead, I still think it is a good defensive name."
Barrons's has weighed in on Wal-Mart several times in the last year, including a bullish call in September that has proven to be timely. From the time that story ran until the Feb. 17 close, the shares gained 15%.
Wal-Mart plans to trim prices further in the coming months, a move that is expected to keep shrinking margins. And in the fiscal year slated to end in January 2013, the company expects to earn from $4.72 to $4.92 a share.
Wal-Mart has been aggressive in opening smaller stores more closely tailored to local communities' individual appetites. It also reversed a previous decision to winnow its product offerings at large stores, reaffirming its long-standing wide selection.
These efforts have boosted traffic in the U.S., where same-store sales rose 1.5%. Internally, sales rose 11%.
And Wal-Mart continues to boost its investment in China. On Feb. 15, the company announced an agreement to boost its investment in the holding company Yihaodian, giving it a controlling stake in one of China's fastest-growing e-commerce websites.
Wal-Mart is also aggressively buying back stock. And some analysts see a dividend hike next month, perhaps by as much as 9.5%, to roughly 40 cents a share (on top of a more than 20% hike to Wal-Mart's quarterly dividend last year).
"Investors are feeling less of a need for defensive names, but Wal-Mart is a steady company and has a great valuation," says Rochdale's Abella. "There is still good reason to be in the stock."
Of course, some investors are growing more cautious toward Wal-Mart, given the pressure on sales and margins. On Tuesday, S&P Capital IQ downgraded the stock to a "buy" rating from "strong buy" and cut its earnings-per-share projections for the current fiscal year by nine cents to $4.82 a share.
Still, Wall Street is guessing that Wal-Mart's earnings will hit $4.90 a share this fiscal year. Based on that estimate, the stock trades at roughly 12 times forward earnings.
Add to that a decent dividend, and Wal-Mart can still deliver attractive returns.
