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Is Wal-Mart Undervalued Today?

By Anders Bylund - Apr 1, 2013 at 2:03PM

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Wal-Mart never stopped growing its top line, bottom line, and cash flow even as investors left the stock for dead.

The market is supposed to be a hyper-efficient weighing machine in the long run, but that's not always the case. Those mismatches between market value and business performance often create outsize investing opportunities.

For an example of this, take a look at retail giant Wal-Mart Stores (WMT -10.85%). The stock price is struggling to keep up with Wal-Mart's peers on the Dow Jones Industrial Average (^DJI 1.10%) over the last decade, even if you reinvested every dividend check along the way:

WMT Chart

WMT data by YCharts.

But you can't blame Wal-Mart's business for any of this market lag. Over this period, the store chain has doubled revenue while nearly tripling cash flow and earnings. Keep in mind that the Waltons have been battling the law of large numbers throughout this decade. It's not easy to double a $230 billion top line, you know. Investors should expect more than a 56% total return for this fantastic performance.

WMT EPS Diluted TTM Chart

WMT EPS Diluted TTM data by YCharts.

The master of low costs and high efficiency thrives in challenging markets, as you can see in the cash flow spike during the 2008 recession. Free cash flow keeps growing at a double-digit clip every year, so you can't even claim that Wal-Mart shares should be cheap due to dying growth.

WMT PE Ratio TTM Chart

WMT P/E Ratio TTM data by YCharts.

All things considered, Wal-Mart shares look spring-loaded at current prices.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$32,579.42 (1.10%) $357.33
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$132.13 (-10.85%) $-16.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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