Inside Wall Street: The bargain that's Wal-Mart

The world's largest retailer stays on top with unheralded canny strategic moves.

By Gene Marcial Jul 31, 2013 1:58PM

Wal-Mart store in Secaucus, New Jersey / Jin Lee/Bloomberg via Getty ImagesFor those who haven't noticed, Wal-Mart (WMT) has been one of the market's large-cap super performers, steadily climbing to new high ground since the financial meltdown and deep recession.


From a low of $47 a share in 2009, the stock has catapulted to a high of $79.96 a share in May 2013, and some analysts and investors expect the stock to rocket to the mid-$90s in a year or so. It closed at $77.89 on Tuesday July 30.


What's powering the stock? Apart from the market's robust advance this year, investors have responded positively to the company's quiet efforts to re-energize its global leadership as the world's largest retailer, and maintain its price leadership while improving operations and products to steadily sustain earnings and sales growth.


"Wal-Mart's massive scale gives it an edge in obtaining at a low price virtually everything it wishes to offer its customers," says Stephen Leeb, president of Leeb Asset Management, which owns WMT shares in its core long-term portfolio.


And Wal-Mart has a lot more stores, he adds, than any other retail or supermarket chain -- more than 4,000 Wal-Mart stores around the country compared roughly to 2,400 locations for the next biggest grocer, Kroger.


It's the grocery business, says Leeb, where Wal-Mart is making great inroads with its bargain prices it offers. Groceries currently account for 55% of the giant chain's sales and becoming an increasingly important segment.


Wal-Mart operates a chain of more than 10,000 discount department stores, wholesale clubs, supermarkets, and supercenters worldwide, including stores in China, Japan, Africa, Argentina, Brazil, Chile, Mexico, Central America, India, the U.K. And in the U.S., Wal-Mart is expanding efforts to become a complete American enterprise by increasingly buying U.S.-produced goods. It plans to invest an additional $50 billion over a period of 10 years starting in 2013 for Wal-Mart's U.S. stores and Sam's Club to buy domestically manufactured goods.


"We remain impressed with Wal-Mart's commitment to improving the productivity loop and price leadership," says Robert S. Drbul, analyst at Barclays Capital. He rates the stock as "overweight" with a price target of $90 a share. The $50 billion additional investment, he notes, will mark additional growth on top of the two-thirds of total Wal-Mart U.S. receipts currently spent on goods made, sourced, or grown in the U.S.


These products will be identified with "Made Here" tags featuring an American flag. Drbul estimates that any incremental costs incurred by the Buy-U.S. program will be offset by lower lead times "and the ability to buy smaller amounts of inventory vs. the typical buckets for domestically produced materials." Moreover, he believes this new initiative will improve product quality that should produce longer-term positives.


Further upside to the mid-$90s, says Drbul, will be supported by the potential to build on current momentum in traffic trends and leverage expenses to offset any pressure on gross margins. A higher target of $95 a share is based on 16 times his upside earnings target for 2014 of $5.95 a share on projected revenues of $513.1 billion. For 2013, he figures Wal-Mart will earn $5.30 per share on sales of $487.6 billion, up from 2012's $469.1 billion.


Although Wal-Mart is considered one of the top "defensive" stocks that do well even during difficult economic times, the stock is also regarded these days as a growth stock that chalks up sustained yearly earnings power in bad or good times.


"By many measures, Wal-Mart is one of the top defensive stocks in the stock universe," notes Leeb. "But unlike other defensive stocks, whose price-to-earnings multiples are in the 20s while earnings growth is below double digits, Wal-Mart shares trade at about 13.5 times next year's earnings, with prospects of 10% earnings growth for at least the next five years," says Leeb.


That has attracted renewed interest in the stock, once known as just a "defensive" stock. Now, the stock is embraced by institutional investors as a true-blue growth stock, thanks to its highly competitive focus.


So investors who don't own shares of Wal-Mart should. And when they do, the stock should be among their core holdings, to be nurtured as a buy-and-hold investment for the long haul.


Wal-Mart has been quietly making shrewd and savvy strategic moves with little fanfare, elevating the quality of its products, maintaining its leadership as a discount retailer, and penetrating new markets and then assume dominance in them.


With the stock providing a decent dividend yield of 2.4%, "Wal-Mart continues to be a stock for all investors," argues Leeb.





Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.




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Tags: WMT
36Comments
Jul 31, 2013 9:14PM
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That might be true, if it weren't for the fact that a growing number of people simply won't go to wal mart because of their bullying business tactics, and the lousy way they treat most of the people who work for them.  I have not been in a Walmart but once in the last 8 years, and that was a fluke.  10 minutes restored my distaste.  Why would you buy their stock?
Aug 1, 2013 11:43AM
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All the people that say that Walmarts patronage is fading, simply kill me.  Every time i drive by their store the parking lot is jam packed.  As long as the majority of new jobs continue along the low wage scale, Walmart will flourish.

 

Most Americans no longer have the luxury of discerning the word cheap from value.

 

If the contents of this article are accurate, then i applaud the efforts of Walmart trying to once again stock the shelves with American made items!

Jul 31, 2013 9:31PM
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Well here there cloths suck, I buy meat from another grocery because the meat sucks, they only hire blacks and hardly any whites, because the town is racist against whites. Prices are a joke!  Made in China yea like I really want to support another country! So WTF happened to Wal-Mart!  Answer PC Tolerance, and Sam died! 
Aug 1, 2013 10:19AM
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I would be very glad to see American Made Product in Walmart.

 

I do use Walmart to misc item, but I use a butcher for my meats & fish, and Aldi's for my regular shelve items.

 

I don't like support other countries, this angers me. Bring the jobs back to the USA.

Aug 1, 2013 8:33AM
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Two days ago here locally, a guy goes to buy some donuts at the Wal-Mart deli. Every pastry was covered in flies and gnats. The lady at the deli counter said so what and indicated that's just the way it was. Guy called the health dept. Wally World tried to tell them the same thing. Their deli is shut down until they get the place cleaned up.

 

Not sure if this writer has ever set foot in a Wally World, but they are no longer the price leader in groceries, their clothing is sub par but the prices aren't, and household items are about the same price as everywhere else. And even the newer stores have the look and feel of a bus station, dirty and unkempt.

 

I would suspect that in the U.S. Wal-Mart's recent success has more to do with the fact that they attract lower income and welfare recipients whose numbers have swelled with the recession. That will change as disposal incomes rise. I would avoid their stock for 2 reasons: 1. The law of diminishing returns (too big to grow at the pace analysts think they can) and 2. Poor management decisions based on arrogance and greed.

 

Just my opinion. 

Aug 1, 2013 9:41AM
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I will only buy anything at Walmart if there is something that I can't find at another store. But I prefer shopping at Target.
Aug 1, 2013 12:22PM
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My son works there and makes more $$ than I do. I do not buy clothes or meat there but they do price match which is good and their employees do get a discount plus stocks.
Aug 1, 2013 9:40AM
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Our saving grace... the sheer cost to keep those gigantic big boxes sweeping our lives out of our home towns is-- incredible. The more that cheap imported stock rots on those ever-higher racks, the more of it's cockroach-infested groceries hit the dumpster... the more clever bookkeepers can't continue to hide the truth... BIG BOX IMPORTERS ARE BAD FOR AMERICA. No business is WORSE for America and none cheat us out of life, Liberty and the Pursuit of Happiness like Wal-Mart does. The sooner they go out business... the better.
Aug 1, 2013 12:00PM
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Does anybody realize that WM employs more people than any other business.  Boycott would only hurt the economy dumb***.  You libs are a joke, lets destroy what works and fund what doesn't.  Buy the stock!
Aug 1, 2013 1:54PM
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(1) Wal-Mart was a CUSTOMER of ours for a # of years. Eventually they found an off-shore supplier at less than 1/2 our price, gave us the chance to match it, and we couldn't. Regrettably, 23 of our people lost their jobs. This is business, it didn't piss me off, and we were not "bullied." (2) My grandson worked for them for 3 years while in college; made about $10.25 an hour in 2011, they gave him a flexible schedule, he was offered a promotion, AND he stuck up for them on everything. So much for you ignorant naysayers commenting here! 
Aug 1, 2013 11:34AM
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I buy a whole bunch of items a lot cheaper on Amazon.   Example :  I buy Foger's Coffee from Amazon for $ 4.09  ( singles )........Walmart charges $ 4.78 and $ 4.96  , depending on store.   And it is delivered to my door ( gasoline ) !!   I do the same thing with paper towels , toilet paper and many other items !!
Aug 1, 2013 6:36AM
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Boycott this company!!!!Taxpayers have to subsidize their worker's healthcare!!!

Aug 1, 2013 12:15PM
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I don't like going to Wal-Mart for one because most people there don't have any manners, it is always PACKED, the store is a mess, most employees act like they don't want to be there, the lines are way too long, they have unlimited amounts of cheap overpriced crap, and last but not least I always end up seeing someone's **** crack or rolls fumbling out of too small attire!
Aug 1, 2013 12:20PM
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Also, the last time I bought store brand oatmeal from Wal-Mart it ended up being riddled with worms!!!! YES WORMS. I sent it in to the company and they confirmed that they were indeed in the oatmeal and gave me a $10 coupon to Wal-Mart....sorry, but I can not longer eat oatmeal of any kind. I guarantee that if any one of you went to Wal-Mart and bought their store brand oatmeal it would have some sort of bug in it! Whole and in multiple quantities. That is a dare!
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Our family refuses any item that has been purchased from Wal-Mart. We should all be reminded that since Wal-Fart. pays their employees so little, that the majority need food stamps to exist and we all pay for what Wal-Fart doesn't pay. they should be sent a bill for all the food stamps that WE supply their workers. It is astounding that the Walton family lives like kings and queens and their employees live on peanuts for pay. BOYCOTT Wal-Mart.
Aug 1, 2013 9:57AM
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For the sake of profit, a lot of stock owners are willing to suspend the part of their concience that would or should question the immoral, unethical or questionable behaviour the Co they own a part of indulges in to make as large a profit margin as they can and score points on Wall St. Even if that means exploiting workers in "3rd world" countries or exploiting labor laws at home to treat emplyees abismally.All they need to hear is the term "good buy" from their broker and bingo," more money for me" and companies like Walmart continue conducting biz as usual. A succesfull biz model? yes, but at what real cost?

Aug 1, 2013 11:21AM
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When the taxpayers of the USA are paying more than a million dollars a Walmart store annually  to subsidize their employees' salaries because they pay slave wages, WALMART IS ANYTHING BUT A BARGAIN.....
Aug 1, 2013 11:20AM
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the thing about your rants and raves is seven people see them and I am one so six in total.
Aug 1, 2013 9:54AM
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There was a time when Walmart had a sign on the outside of every store that said "Your Satisfaction Guaranteed".
They don't do that now because they can't.  It's a lot of cheap goods sold by throngs of underpaid people who don't care at prices substantially higher than cheap stuff should sell for.
When they fix the above,  maybe they'll be a "good buy".
Will the last person leaving the store to go shop at Target and other competitors please turn off the light?
Ah heck,  leave it on.  Nobody cares.


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