Is Wal-Mart Emerging From the Doldrums
Wal-Mart stock can be thought of as consisting of two eras: spectacular growth and stubborn stand-still. The spectacular growth era for Wal-Mart stock spanned the period from January 1978 to January 2000 when it rose 8,682% from a split-adjusted $0.78 to $68.50, a compound annual growth rate of 22.6%. The stubborn stand-still period since has led stockholders to suffer a 24% loss in value at a negative 2.3% annual rate.
Do recent earnings represent a turning point? Probably not. Wal-Mart's second-quarter 2012 EPS were up 12.4% from the year before and at $1.09 a share, those earnings beat expectations by a penny.Walmart’s net sales rose 5.5% to $108.6 billion -- beating expectations by $500 million.
Wal-Mart did well outside the U.S. Its biggest sales gains were from Wal-Mart International -- up 16% to $30 billion due to sales gains in Mexico, U.K., Canada, Brazil and China; as well as Sam's Club where sales increased 4.9% to $12 billion. In the U.S., Wal-Mart's same store sales fell 1.3%.
Meanwhile, Wal-Mart raised its guidance for 2012. Specifically, Wal-Mart increased its EPS guidance to a range between of $4.41 and $4.51 -- and the mid-point of that range would represent a 7% increase over the previous year's EPS of $4.18.
Is this enough to justify investing in Wal-Mart? Here are three reasons to consider it:
- Good quarterly earnings. Wal-Mart has been able meet or surpass analysts’ expectations in all of its last five earnings reports.
- Decent dividend. Wal-Mart pays an attractive 2.81% dividend yield
- Wal-Mart is out-earning its cost of capital. Wal-Mart is earning more than its cost of capital – but it’s not progressing. How so? It produced no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Wal-Mart's EVA momentum was 0%, based on first six months' annualized 2010 revenue of $407 billion, and EVA that declined from $5.7 billion in the first six months' annualized 2010 to $4.8 billion in in the first six months' annualized 2011, using a 9% weighted average cost of capital
- Expensive stock – Wal-Mart's price to earnings to growth of 1.26 (where a PEG of 1.0 is considered fairly priced) means it is expensive. It currently has a P/E of 11.8 and is expected to grow earnings 9.4% to $4.88 in fiscal 2013.
- Rising sales and profits -- but shakier balance sheet. Wal-Mart has been increasing sales and profits. Its $422 billion in revenues have grown at an average rate of 6.5% over the last five years while its net income of $15.4 billion has increased at a 6% annual rate -- yielding a slim 4% net profit margin. Its debt has risen while its cash fell. Its debt has risen at 9.3% annual rate from $30.7 billion (2007) to $43.8 billion (2011) while its cash declined at a 1.3% annual rate from $7.8 billion to $7.4 billion during the period.
I see no reason to rush into this stock.