Wal-Mart downgraded, but getting tempting

Posted Jul 13th 2006 6:43PM by Sheldon Liber
Filed under: Major Movement, Analyst Upgrades and Downgrades, Forecasts, Rants and Raves, Wal-Mart (WMT)

Yes, Wal-Mart is down sharply this morning and yes, it was downgraded by Merill Lynch. Yes, it might go lower still.

Call me a contrarian -- I have been called worse -- but I think the stock is getting attractive. I want to buy stocks on sale.

Wal-Mart (WMT) is too big to stay out of the news and most of what we have heard the past year seems to have weighed down the stock. Its trailing P/E is slightly below the S&P average at 16.85. but that is nothing to get excited about.

What drew my attention to WMT is its incredibly low price-to-sales (P/S) ratio of 0.62. (source, AOL Money & Finance). Other positives I see:

- WMT has a five year earnings-per-share (EPS) growth rate of just under 14%, a return-on-equity (ROE) of over 23% which is higher than their P/E, another good sign and a return-on-invested-capital (ROIC) of over 14%. It has a 1.4% dividend yield growing at 20% rate over the past five years and plenty of cash (about $7B)~~with no debt~~, manageable debt (thanks Stacey for pointing out my earlier mistake -- haste makes waste writing at 4:00 AM), so that yield is probably very secure.

- The Middle East and North Korea are playing a major role in keeping oil and gold prices high and they are also motivating investors to take flight to the stocks of quality companies. Given Wal-Mart's current metrics it seems like just maintaining its historic profit and growth margins would make it a worthy investment.

- I do not give much credence to technical analysis but I do look at charts for a picture of a companies consistency over time. The chart below indicates that WMT has gone nowhere in six years, even though its profits, dividend yield, number of stores and same store sales have grown.

Chart

- I have read that Warren Buffett has been buying WMT and I do not want to make too much out of that. But from this chart and the fundamentals, it seems like once again his timing might be right.

If you are looking for a long term core holding in troubled times, there is good reason to be looking at the data on Wal-Mart's stock and asking yourself if not now, when, and what is the right price?

I do not expect Wal-Mart is going to double in the near future but if you are one of the lucky people that has made good money in a stock like Google, I think it might be smart to take something off the table and place it in a financially strong company with a great track record and hard assets.

Disclosure: I do not own Wal-Mart or Google nor do I have any option positions.

Tags: contrarian, GOOg, Google, Investing, Sheldon Liber, SheldonLiber, Stocks, VAlue, Wal-MArt, Warren Buffett, WarrenBuffett, WMT

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Reader Comments (Page 1 of 1)

7-13-2006 @ 10:14AM

Stacey said...

Whoever posted the previous message is not revealing the correct facts about WalMart.

S&P reports WMT has long term debt of $30 BILLION as of the end of last year.

This shows that nobody should trust what other people write here, no matter how well-informed they come across. Always check things out for yourself!

7-13-2006 @ 11:46AM

Mike said...

The market is not looking at fundementals when it comes to Wal-Mart. They're focused on abstract numbers such as same-store-sales, and union/media slander campaigns that do not paint a clear picture of the health of the retailer.

With sales over $300 billion per year, won't see the double-digit sales growth that has occured in the past. It is mathmatically impossible. But as the company grows both domestically and internationally there is no doubt that sales will continue to trend in the right direction.

Is the stock being depressed by the newsmedia? Almost certainly. As investors we need to decide whether there is value in simply accumulating this stock at a good price.

If Chicago or other cities begin to impose restrictions on supercenters then Wal-Mart will grow it's Neighborhood Market brand.

Trust Eduardo Castro Wright. This guy seems to be turning the enterprise into a store that can be relevent to everyone.

With the economy trending downwards, where will folks go to buy paper-towels, food, cleaning supplies? The core business will always be there. Getting those folks to cross the aisle and spend a little of their discretionary income will be the trick.

9 month low? This is a buying opportunity.

7-13-2006 @ 9:43PM

Sheldon said...

Stacey,
Thanks for the assist. That is why I tend to give a reference for my info so that everyone can look for themselves. "Those that do not make mistakes, usualy make nothing at all" ...forgot who said that.

7-13-2006 @ 10:41PM

Bill said...

Personally I would make a deal out of Warren Buffett BUYING THE STOCK. Every stock he invested a large sum has compounded at a rate higher than 15% annually over time. Buffett NEVER pays alarge sum for his stocks and he bought Mclane from wal mart and respects their operations. I own altria Berkshire and budweiser and took my first"bite" wal mart today. My book Consume Consume Consume More uses a similar formula to what Buffetts uses to calculate intrinsic value. Your facts about the stock are very accurate and well stated.peace

7-14-2006 @ 5:16PM

Anthony said...

I would say 30 billion dollars in debt for a company of this size sales and profit is very manageable. There are companies out there in alot more and not near the size.