Is Wal-Mart Worth New Money Right Now?

Wal-Mart (NYSE: WMT  ) , the world's largest retailer, has seriously upped its efforts to turn around eight straight quarters of falling U.S. same-store sales. It also recently announced plans to repurchase close to $15 billion worth of its shares in an attempt to take advantage of what it believes to be an undervalued stock price and to generate returns for its investors and attract new ones.

The trouble is that Wal-Mart's share price has been more or less stagnant for more than a decade. Will that change anytime soon?

Talking revenues
In the past five years, revenues have grown at a compounded rate of 5.9%, whereas in the past 12 months, revenues have grown by only 3%. This fall has primarily been because of the combined effects of the recession and rising gas prices, which have seriously pressured consumers' purchasing power. Buyers have flocked to cheaper and more convenient discount stores such as Family Dollar (NYSE: FDO  ) and Dollar General (NYSE: DG  ) in search of rock-bottom deals.

Revenues have continued to grow thanks to Wal-Mart's international operations, which have shown strength. Going forward, analysts estimate the company's earnings will grow by 10% annually in the next five years. Clearly, expectations are great -- at least on the bottom line.

Much of the growth will come from the company's international segment, but Wal-Mart has also recently taken steps to help increase same-store sales in the U.S., seeking the help of the Web and social media, as well as introducing a smaller store format called Wal-Mart Express, to help drive sales in the long run.

Efficiency
A good way to judge a company's performance is through its return on equity, which shows how well it has been using shareholders' money to generate profits. Wal-Mart outperforms its closest competitors on this front, with an ROE of 23.4% in the last four quarters. Target's (NYSE: TGT  ) ROE stands at 19.1% and Costco's (Nasdaq: COST  ) is at 12.6%.

Stability
Debt-wise, I have no substantive concerns about the way in which this company is being managed. Nevertheless, it's important to take a look at the company's cash-generation ability and its ongoing obligations to debt-holders.

Wal-Mart's free cash flow for the past 12 months stands at $12.1 billion, which is extremely solid. With a very high interest coverage ratio of 11.4, the company is in no real trouble financially to service its debt, which is great.

Valuation
Wal-Mart appears to be a relatively cheap stock from a P/E standpoint. Its forward P/E stands at 10.7, compared to Target's P/E of 10.4 and Costco's P/E of 20.7.

Another thing to consider here is that Wal-Mart has already spent $12.9 billion on share repurchases in the last year and plans to spend a further $15 billion on buybacks because it believes current prices to be compelling. If it's income you're after, the company just raised its dividend by 21%, to $1.46 annually.

These are all good signs from an investor's point of view.

The Foolish bottom line
I see Wal-Mart's initiatives to boost same-store sales paying off in the long run. Considering the returns an investor would currently get, and also taking into account the growth potential of the company, it seems like a good investment.

Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Costco and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 24, 2011, at 3:45 PM, madmilker wrote:

    With all the George Washington's leaving America today for foreign lands....where do you think that money will come from if it did....

    On Wal*Mart's China web page under "About Us."

    "Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development."

    5% foreign in China...

    That doesn't support American exports and American jobs.

    Remember what Lance Winslow wrote in that article "The Flow of Trade in a Global Economy"....

    "Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too."

    Think for a moment about George Washington....yes the man that is on the US dollar bill....How do you think George feels being sent overseas in return for all that foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anything for the foreigners to buy. Cheap items didn't make this great union of 50 states the greatest place on the face of this Earth.....the American worker (union and non-union) did.

    You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. This is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's that make stuff including the United States of America....that doesn't produce very many jobs outside of China.

    Being an old person myself and knowing how it was back in the 40's, 50's and 60's in this union of 50 states....I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches just maybe one day he will shake mine again.

    Fifteen cargo ships pollute as much as 760 million automobiles.

    $9 billion a year in hidden taxes to all American taxpayers to clean fish from ballast tanks of ships...

    think about all those facts the next time you pull that George out of your pocket....

    Retail makes NOTHING...

    Governments only make MORE DEBT...

    It's time for less of those two and for America to get back to what it does best....MAKE STUFF..

    cause George Washington on that dollar can't help anyone in the United States of America if he is being held in a foreign hand.

    Made In America is the only way out of this mess cause foreign made put US here.

  • Report this Comment On June 24, 2011, at 8:34 PM, Twirpy wrote:

    Well Madmilker, congratulations on a bizarre, convoluted, long-winded, irrelevant and factually challenged post that has nothing to do with whether or not Wal-Mart stock is a good investment today.

    Are you a macro-economist? You sound so sure of yourself, but don't seem to understand that macroeconomics and the world economy is not a zero sum game. Certainly it is not a bad idea to "buy American," but the only real way America thrives is by insuring competitiveness so that people all over the world want and need American products and services. Sorry, but "Retail makes NOTHING" is an irrelevant statement because retail does only what all businesses must do. It creates VALUE.

    Oh wait, that is what Wal-Mart is doing in America and in other countries right now. Perhaps you should support them instead of trying to tear them down? Perhaps less complaining and buying more stock in companies with successful international business models is the best thing Americans can do for themselves and their country right now. I'm sorry to be the one to tell you that your post doesn't belong on an investment website. It belongs on a website designed for political rants from people who don't know what they are talking about. Have you checked out Yahoo Comments?

    Fact check:

    “Governments create only debt.” --False, governments provide roads, education, national security, investment in science and research, police and fire depts, legal structure, resolution of civil disputes and other infrastructure that makes the success of businesses and the economy possible.

    “Retail makes NOTHING.” --False and misleading, retail creates value, as does any business.

    “You can't have a strong country without having a strong currency” --False, many have complained about China having an unfair trade advantage precisely because they keep their currency weak.

    “you can't have a strong currency unless you keep it floating around within your 50 states.” --False and misleading, a great source of strength for a currency is that it is desired and held in other countries. False on another count, international trade is a source and or a sign of economic strength, not weakness.

    “$9 billion a year in hidden taxes to all American taxpayers to clean fish from ballast tanks of ships..”

    --Huh? You made the statement, I'll let you support it?

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