Wal-Mart Wakes Up

 | Nov 14, 2011 | 1:30 PM EST  | Comments
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The 13-week rise in Wal-Mart (WMT) shares -- 19%, double that of Target (TGT), and bringing it a stone's throw from a 52-week high -- has been one of the least-discussed events on the Street. Why the hush-hush?

I believe many analysts simply relegated Wal-Mart shares to the scrap heap, seeing stronger investment theses on the dollar stores that for the better part of two years have hammered away at the retail behemoth's dominance. Instead of living in the here and now, the Street decided to overlook the positive developments as the calendar switched to October, which included a reiteration of positive comparable-store sales trends at the U.S. base, a dip in the dollar from the September peak and a concurrent decline in the savings rate and leveling off in gasoline prices that can ignite spending by Wal-Mart patrons. Not a single analyst who has the stock at a Hold or Neutral rating has upgraded, let alone step up sales and earnings assumptions for the holiday quarter and 2012, despite the market's whispers of brighter days in the future.

Am I pounding the table on Wal-Mart? Not exactly; there's plenty of near-term risk ahead of Tuesday's earnings report. However, I am more comfortable in recommending the stock as a play into 2012 in light of the improvement in the fundamental indicators that I track on the company.

  • U.S. comps strengthened sequentially in each month of the second quarter, and the trend continued -- after two years of malaise -- in the third quarter. (U.S comps could achieve the upper end of guidance, or 1%). Product add backs, a price match campaign and more effective marketing of a low-price promise arrive against a backdrop of easy comp comparisons, usually a favorable scenario for an investment in a retailer.
  • There is a newfound buzz surrounding Wal-Mart's U.S. initiatives to take the fight back to dollar stores and Amazon, including dot-com pop-up stores and tailoring merchandise assortments via social media. These pushes have reawakened the bulls to the possibility of a Wal-Mart U.S. soon producing same-store sales growth of 2% or more, instead of negative to slightly higher, as had become the norm.

The looming earnings report card will be of greater interest than usual as a result of the turnaround in the U.S. business; Wal-Mart could beat its own raised guidance again, and the holiday quarter may wind up a winning three-month period. With the business trending the way it is, an investor with the appetite to ignore the broad market volatility can purchase Wal-Mart at 0.48x forward sales (vs. 0.53x at Target); a P/E multiple of 12x (vs. 12.2x at Target), which is below the low reached during the Great Recession; and an all-time high dividend yield of 2.5% (vs. 2.3% at Target).

Remember, I think consensus estimates remain too conservative on Wal-Mart for 2012, meaning as the business surprises with comp growth in excess of 1%, the stock's multiple stands to expand and finally close the gap with Target. WMT could even trade at a premium to Target; that company's operating margin is under pressure from its venture into Canada.

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