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?
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.
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%.
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.
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.