Wal-Mart (WMT)
In the midst of some of the worst economic times the United States has ever seen, consumers are saving in efforts to maintain a certain quality of life. One company’s motto reflects this mindset: “Save money. Live Better.” Wal-Mart (WMT), the retailer of all retailers, has over 7,800 stores in 16 worldwide markets. Should this mega-corporation be a part of your portfolio?
Wal-Mart has become the master of slashing prices and providing variety to its customers. The company’s superstores have become a one-stop shopping place where all living necessities can be satisfied simultaneously. From groceries, to electronics, to furniture and beyond, Wal-Mart provides shoppers with cheap prices and diversity of products.
The company can consistently beat the prices of its competitors because of its gigantic economic moat. As a retailer, Wal-Mart simply takes the products of other manufacturers and sells them at its stores. Wal-Mart has become so massively popular and successful that retailers actually compete to be in its stores! This allows Wal-Mart to effectively decide what prices the manufacturers will give them. Other retailers do not have this luxury, and those companies cannot deliver prices that compare.
As the bad economy gets worse, customers will continue to leave expensive retailers and seek bargains at Wal-Mart. This idea is no longer a hypothesis; the numbers are proving it. Wal-Mart released its February sales report last week. The company’s U.S. same-store sales increased by 5.1% compared to February sales in 2008.
Even better, Wal-Mart is beating out its competition. In the company’s most recent earnings report, CEO Mike Duke stated, “Our performance relative to competitors was exceptionally strong in the 4th quarter. We expect this momentum to continue.” Indeed it has. Both Target (TGT) and Costco (COST) missed expectations in February, when the companies’ sales dropped 6% and 3% respectively. The only retailer, other than Wal-Mart to increase same-store sales was BJ’s Wholesale Club (BJ). BJ’s still missed expectations when its sales increased by a mere .6%.
Wal-Mart rests on incredibly solid fundamentals. The company has $7.28 billion in cash, and it’s currently the second largest company in the S&P 500, with a market capitalization of $191.92 billion. On the same day as the February sales report, the company increased its dividend by 15 cents to $1.09. Currently, this is a 2.2% yield.
My biggest concern for Wal-Mart was international sales. The company’s international sales decreased 10.8% in February. My worries were alleviated when I learned that the drop could be completely attributed to higher foreign exchange rates brought on by the strength of the U.S. dollar. If the exchange rates were the same now as they were in February 2008, international sales would have actually increased by 9.9%! This means that Wal-Mart’s international business will start bringing in more cash as the dollar loses ground against other foreign currencies.
Wal-Mart’s stock price is currently down 21% from its 52-week high of $63.85 set on September 19, 2008. At $48.91, the stock is currently trading at 14.42 times earnings. While this P/E ratio makes the stock more expensive than many of its competitors, I don’t believe that WMT is overvalued.
Wal-Mart is thriving in a time when most companies are cutting dividends, laying off workers, and closing stores. The company is hitting its stride while everyone else is tanking. When people say that we’re witnessing some of the best buying opportunities in history, they’re referring to Wal-Mart. I encourage you to do some research of your own and discover the potential money to be made.
-Matt Schwartz
College Trillionaire
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