In the lost decade of investing that has characterized the last 10 years or so on Wall Street, few stocks have been stuck in the wilderness quite as long, or as stubbornly, as Wal-Mart Stores. A $50-a-share stock in the late summer of 2001, it's still mired at near that price.
Long gone are the whirlwind days when Wal-Mart (WMT - News) locations sprouted like the kudzu in the southeastern U.S., where Bentonville, Ark.-based Wal-Mart is headquartered. Instead, domestic store openings — especially its bedrock full-size locations — have stalled.
Many investors have felt ripped off by Wal-Mart over the past decade. One joke perpetuated among institutional investors traces the lifeline of the Wal-Mart investor thusly: You start out buying the stock. You move on to shopping at the stores. Eventually, you end up working at one.
But at its current depressed level, Wal-Mart's stock, like the company's cheaply priced merchandise, seems like a value that shouldn't be missed.
While anybody can see that its price has leveled off for a decade or more, Wal-Mart's price/earnings multiple has absolutely collapsed. Thanks to continued growth of both sales and profits, it's much, much cheaper today than a decade ago, when investors were paying 42 times trailing profits to ride the Wal-Mart sports vehicle. Today, it's an economy ride, but one that only costs 11 times trailing earnings to board.
Part of that equation, of course, has been the aggressiveness with which Wal-Mart has gone about retiring its shares. James Grant, editor of the influential Grant's Interest Rate Observer, has quoted statistics that suggest that, over the last eight quarters, 445 million shares of Wal-Mart have been repurchased by the company. (At the current rate of buybacks, Grant figures, it'll take 15 years to retire all but one share of Wal-Mart stock, a share that — based on its current market capitalization — would be worth $181 billion. At least, theoretically.)
Meanwhile, even amid thin margins, Wal-Mart absolutely gushes cash flow — cash that it's happy to share with investors. Over the last four quarters, one analyst says, it's paid about half its $10 billion in cash flow to shareholders in the form of dividends. Right now, the dividend yield is 2.8%, well ahead of a 10-year Treasury yield.
Earlier this year, it raised the dividend by just over 20%. Even if it doesn't grow its business — a dubious proposition, given its growth initiatives — it could double its annual dividend payment in the coming years.
Still, even as it's generating a generous yield, most investors also want to see some share appreciation. And it's here that Wal-Mart hasn't delivered. Year-to-date, shares are actually off 3%, while the average "dollar-store" merchant — such as Family Dollar Stores (FDO - News), up 8% this year, and 99 Cents Only Stores (NDN - News) , up by 27% — has been a big winner in a declining market.
Peter Benedict, a retail analyst who follows the company for Robert W. Baird & Co., has an Outperform rating on Wal-Mart shares, largely because it's one of the cheapest stocks in his coverage universe. But, as investors recognize, cheap stocks can be like a law of physics: They can stay that way a long time, as Wal-Mart has.
"Wal-Mart's got to show improving trends," Benedict says.
That, he believes, is happening. While Wal-Mart is one of a handful of retailers that chooses not to release monthly sales results, Benedict believes Wal-Mart is shortly going to end what some analysts have pegged as an eight-quarter stretch of negative domestic same-store sales comparisons.
One sign of the changing times: Wal-Mart's announcement earlier this month that it is reviving its layaway program for electronics and toys this holiday season.
Meanwhile, Wal-Mart, which has tacitly acknowledged that the domestic market has been saturated with its "classic" store model, with an enormous square footage and wide selection of products, has been aggressive in opening smaller stores more closely tailored to the local community's appetites.
Management also has reversed a previous decision to winnow its product offerings at large stores, reaffirming its long-standing wide-selection reputation.
"It isn't that Wal-Mart hasn't grown earnings," Benedict insists. "It's just the P/E that's collapsed."
"But what's going to drive this stock is positive same-store sales, and that's what we find so intriguing now," he adds.
No comments:
Post a Comment