WMT

[JTrout]

WMT (http://www.valueline.com/dow30/f9638.pdf)

I'm considering a purchase. The #s look very good to me, and I think the risk/reward ratio is extremely good.

Positives:
3-5 yr. expected earning growth 13.5%
3-5 yr. expected Total Return 15+% (currently @ 43.75)
A++ Financial Strength
Very High Earning Predictability
Aggressive share buyback program
-----------------------------------------------------

This stock has dropped in price significantly since 2000 (41.4 -68.9).
In this time,
it's earnings have grown from $1.41 to $2.50.
It's profit margin, ROE, cash flow, = or better.
It has bought back app. 10% of it stocks.
---------------------------------------------------------

I realize the P/E ratio was way out of whack in 2000, and has made corrections, but at less than 20 right now, I think the correction is complete.


Play devil's advocate.
What am I missing? What's holding this stock back?


Thanks in advance.

not much room to grow

[JTrout]

"China is now at the forefront of Wal-Mart's foreign store-opening program. Just 32 stores started up in that huge country since 2000, but sq. footage there is slated to increase by 30%- 50% in both fiscal 2005 and 2006. Wal-Mart's goal is to expand from 46 units in 22 cities, at present, to most local markets over the next 10 yrs., which implies a store count of at least 400 in China by then."

"The co. is making headway in penetrating domestic urban markets."


From S&P stock research:

Investment Rationale/Risk September 01, 2005

We have a strong buy recommendation on the shares. We believe WMT will remain well positioned to increase its U.S. market share, due to continued low price leadership, an expanding merchandise assortment with improving quality, and strong square footage growth. An improving economic environment coupled with strong store expansion plans should provide WMT with an opportunity to better leverage operating expenses. These factors bode well, in our opinion, for a return to more robust sales and earnings growth over the next few years.

Risks to our recommendation and target price include economic pressures such as rising unemployment or lower consumer confidence, which would negatively affect WMT's core customers and the company's results.

Our 12-month target price of $56 is derived from a blend of our analysis of relative P/E ratios as well as our discounted cash flow (DCF) model. Our DCF model suggests an intrinsic value of $56 to $60 per share and assumes a weighted average cost of capital of 9.0% and a terminal growth rate of 3.0%. We believe the shares should trade at a 15% premium to the S&P 500 on a P/E basis, reflecting the company's leadership position and our projection of an acceleration in comparable store sales growth in FY 06. Applying a P/E of 17.7X to our FY 07 EPS estimate of $3.05 implies a share price of $54.

[cdxx]

[ QUOTE ]
not much room to grow

[/ QUOTE ]

the china bit is good, but it's not going to grow by that much in the next year. you do not need to own walmart to capitalize on china expansion. buy manufacturers, not huge retailers.

[JTrout]

But is growth, or lack of, the final determination?

I like growth, but I like value, too. And safety.
I'm a conservative gambler! /images/graemlins/crazy.gif

Again, the risk/reward here looks very good to me.


It looks to me like a low-risk way to make 50% on your investment over a 3yr. period, or so.

[JTrout]

[ QUOTE ]
the china bit is good, but it's not going to grow by that much in the next year. you do not need to own walmart to capitalize on china expansion. buy manufacturers, not huge retailers.

[/ QUOTE ]

What about Home Depot (http://www.valueline.com/dow30/f4402.pdf) ?
Do you like it better, or is it too much of a huge retailer, also?


Thanks for your thoughts.

[buffett]

There's no way you're going to get me to play devil's advocate on the issue of buying WMT right now. But there is one other thing to consider. If it's within both your Comfort Zone and your Circle of Competence, then you might want to take a look at the Jan08 calls. (If it's not in both, though, just forget about it.)
If you're right about making 50% on just the stock, the Jan08s will do far better. Here's two scenarios, one with the stock hitting 60 and one at 65 (each of these two prices was determined by the time-tested methodology known as SWAG (http://en.wikipedia.org/wiki/SWAG)):

Security / Price / End Value / Gain
Stock / 43.60 / 60 / 38%
Jan08 @40 / 9.10 / 20 / 120%
Jan08 @45 / 6.70 / 15 / 124%
Jan08 @50 / 4.40 / 10 / 127%

Security / Price / End Value / Gain
Stock / 43.60 / 65 / 49%
Jan08 @40 / 9.10 / 25 / 175%
Jan08 @45 / 6.70 / 20 / 199%
Jan08 @50 / 4.40 / 15 / 241%

-web

[squiffy]

Good post. This is what we need more of. Specific discussions of hard facts, about specific stocks. And you even post some raw data. Let's discuss and please come back to it in 3 months, 6 months, 1 year.

It's very frustrating that here and on Yahoo it's nearly impossible to find anyone with intelligence willing to seriously discuss the merits of a stock.

Basically it's a bunch of 15 year old kids who have 100 shares swearing at each other.

Let me study it and read the annual and quarterly reports and will get back to you in a few days.

[squiffy]

I will probably make about 10-15 separate little posts, as time permits. So please be patient.

First of all, in the long term 10 years/20 years or even ultra long term 30-40 years, WMT will be and is a great stock.

Read Stocks for the Long Run by Siegel.

Second, small investors really need to consider the short term too, because they tend to have a more limited capital inflow, a shorter time horizon, etc.

Third, before you even consider the stock's fundamentals you need to look at the short-term economic picture in America and Overseas.

Long-term WMT should do well in China. Are they involved in India? How long will it take before we see profits overseas? How much a percentage of WMT's total profit are overseas stores?

Is there much room for expansion in the U.S. or is the market saturated?

If most of the profits are from teh U.S. currently and in the forseeable short term future. Then let's focus on the U.S.

Right now, the chart has been going down? For about a year to a year and 6 months? WHY? It peaked in 2003 in what month? WHY.

First explain that to me. IF you haven't considered that. ANd if you cannot give me a plausible answer to that question. THen there is nothing further to discuss.

[squiffy]

What factor or factors most affects a stock's future price on the market? What makes the chart go up, up, up? What makes the price jump?

This is my second question for you. Just to make sure we are on the same wavelength in terms of basic theory of investing.

[Sniper]

[ QUOTE ]
It's very frustrating that here and on Yahoo it's nearly impossible to find anyone with intelligence willing to seriously discuss the merits of a stock.

[/ QUOTE ]

Strange, I find the information provided by the knowledgable posters here to be of fairly high quality!

[squiffy]

I would say on Yahoo, about 90% or more of the posts are not helpful. It's a bit more helpful here. But still, not as many specific stocks discussed, as I would like.

[squiffy]

PE is about 17, the lowest in about 8-10 years, since 1995-1997.

Long term future seems favorable with possible expansion in China. But currently most profits come from the U.S. Only 20% of profits from foreign stores, mostly Mexico.

So short term, the question is how are things in the U.S.

Why has the stock price been going down for 1 year and 6 months?

Why do you expect that trend to change?

Who does Wal-Mart serve? Who are it's primary customers? Will those customers be buying more or less today, tomorrow, the next day?

How is the U.S. economy doing? How is it likely to perform in the near future? How will that affect Wal-Mart.

If you want to buy stock in an umbrella manufacturer you might want to know the weather forecast -- will the upcoming season be very rainy or dry?

Having said that, WMT definitely looks interesting.

[Sniper]

[ QUOTE ]
It's a bit more helpful here. But still, not as many specific stocks discussed, as I would like.

[/ QUOTE ]

SO start some specific stock threads /images/graemlins/wink.gif

[JTrout]

Thank you for the time and effort you've put into this thread.
The U.S. economy has it's problems right now. Most notably is fuel cost. There is no doubt that the cost of filling up your vehicle is putting a strain on the already tight budget of the typical Wal-Mart customer.
However, this does not mean that these customers will stop shopping Wal-Mart, only that they may spend less.

Necessities will be purchased at the cheapest place in tight times.
And, too, some people that choose a higher end grocery store or dept. store may begin to spend more at WalMart in an effort to cut costs.

I grew up in a small town- with migrant workers, factory workers, middl-class folks, and upper-middle class.
And they all spend some of their money in WalMart.
I have been in dozens of different Wal-Marts, and they are always full of customers. Always.(I know, "Always" is a strong word /images/graemlins/smile.gif)

The main reason that WalMart has been stagnate the past 5 years is that it is reflecting what the market has done as a whole.
Walmart, and the market, were significantly overpriced 5 yrs. ago, I think most everyone agrees.
It may or may not still be overpriced- that is a debatable topic. But it's certain that much of the risk of purchasing and owning WMT (or the market) has declined in the past 5 years.

And they are increasing their e.p.s. every year.
And increasing their sales, while maintaining profit margin.
And their ROE is maintaining, even growing slightly, at a very respectable 20% or so- indicating solid mgmt.
Increasing cash flow and dividend consistently.

Their Earning Predictability is rated the highest that Value-Line rates.
Their earnings the past 12 mo. is $2.50 per share.
Their earning projection is to be at $3.00 per share in 12-18 mos., and $4.40 in 3-5 yrs.

At $44 price tag, I'm paying a forward P/E of 15 and 10, respectively, for low-risk growth of 13.5%.


Short-term= who knows. WMT is just as likely to be down as up. But coming into Christmas season, I like my chances.


I don't know why WMT has declined the last few months, and I should.
Maybe they missed earning projections by a cent, maybe some analyst put out a negative report or article and the sheep followed.

However, I look at it as a positive opportunity, rather than a major concern.

But long-term is where we have our advantage in the market, and WMT long term looks very attractive to the risk-averse investor.

[squiffy]

I am still trying to figure WMT out.
Clearly a great long term buy. BUt is this the right entry point? Not clear. What if a recession hits.

Note price has been dropping for 1 year and 6 months from high of about 62 in Feb. or March 2004. General trend is a downslope. Very strange.

Note the last official recession we had was from 3/2001 to 11/2001. Note graph during that time shows some peaks and valleys, but basically a stable, then declining price.

So even WMT hurt by recession.

Note recessions are declared late. I guess many months or even years after the fact. So not clear if we have had any recessions since then.

And even if we have no recession, I suppose we can have a down stock market, or a particular stock price can go down.

The reason I emphasize the question of why WMT has gone up and down in the past 5 years, is that to be a great stock picker, it helps to understand how the company is performing and why it is performing well or badly. Is it management, growth, the U.S. economy, the world economy etc.

If the problems are temporary, then it is a great buy and a GREAT TIME to buy. If the problems are long-term and hard to solve it may not be a good time to buy.

Sometimes a stock price will hit a 10 year low. If you buy after it hits a one-year low, this can suck.

Imagine buying KO at 60 in Jan. 2001 and watching it drop to 44 over the 4 years and 10 months to Oct. 2005. Great investment right? Great company long term, right? But short of medium term, you kissed your money good-bye. Not much fun.

If WMT is at the start of a 5 year decline in price, do you want to buy now after a 1.5 year decline in price?

You can invest at any time or for any reason you want. After 5 minutes, 5 hours or 5 days of research. But in my mind, unless you can understand the company, and it's past ups and downs, its hard to realiably predict its future ups and downs.

Note one thing from the last annual report. That some heavy selling may have been done my index funds in something like 3/05 and 9/05 due to re-weighting by the S&P 500 Index. SO that may have had some downward effect on the stock. Though how much I am not sure.

On the other hand WMT has been buying back stock, which should have helped prop up the price.

So if WMT has had such great numbers recently it makes no sense to me that it's price has been dropping while it's profits have been solid.

S&P 500 has been even or slightly down this year. Dow is slightly down. AVP, BUD, and WMT all down. I am wondering if we are in a recession now? Or whether it is a temporary down market.

I wonder if all the money pouring into real estate, which is artificially INFLATED, is part of the reason that WMT, AVP, and BUD are artificially LOWER.

I guess so far, I am very interested in WMT. I thought it was too high before and did not pay any attention to it. I am glad you mentioned it. So far it does look inviting.

It also looks pretty volatile, it seems to go down a lot in recessions and up a lot in recoveries, so a great stock if you can get the timing right.

I am just figuring out how much money to put into it and when to buy.

What worries me is that there is increasing inflation, increasing cost of the war in Iraq and Afghanistan 7 billion and 1 billion per month according to the papers, higher oil prices, etc.

So I need to understand why price has dropped so much from 60 to 44 over 1.5 years, when profits have been increasing by 10-15% per year for the past 3 years.

If it goes back from 40 to 60 again, that's an easy 50% gain in a year or so. If you have the courage to use options, you can do even better. Though I would have to really be sure of why it has gone down, before I used options.

If you cannot figure out why it has gone down, it's also hard to predict why it will go back up and when.

[squiffy]

Here is my question. Greenspan's comments suggest the economy is strong. But stock market is stagnant or down. And WMT in particular is way down from 60 to 44.

So economy may be strong due to real estate, but stock market itself is weak. See AVP, BUD, WMT. Dow. S&P 500.

In a rough sense if you look at WMT chart, it almost looks like 1 year down, 1 year up, 1 year down, 1 year up for the past 5 years. Why? Kind of a strange graph.

[Glenn]

WMT is inversely correlated to the price of gasoline. A large part of WMT's profits come from poor people spending their case money. Now that gas/heat/etc is so expensive, these people are forced to spend their case money on that. However, since the economy is not terrible and huge lines of credit are currently extended with low interest rates, middle income people have not yet been forced to step down to WMT. I like a calendar spread. The stock will do well long term but I don't expect much in the near future.

[fingokra]

WMT must be a different store in your neck of the woods. In the southern states all classes seem to buy the majority of consumer durables at WMT. It is considered a discount store but their prices are seen as how much something is supposed to cost. WMT retail here basically determines market value. Their customer base is not determined by class,here.

I contend that WMT may do better with higher gas prices because more people will choose to seek discount sellers instead of retail sellers. Also WMT has a growing interest in gasoline retailing.

[Glenn]

I didn't say their customer base was determined by class. I said right now the low class is broke but the middle class isn't broke enough to move their higher end purchases to WMT. Your statement that WMT is positively correlated to gas prices is silly since high gas prices take money out of the pockets of consumers--money which is not spent at WMT.

[fingokra]

It may take disposable income out of the hands of people but people will still be buying soap, toothpaste, toliet paper, soft drinks, etc. They will be more likely to be looking for a good price, and thus WMT. I am just saying this type of reaction could help to counteract the inverse correlation you were talking about. I don't think this idea seems silly, but to each his own.

[buffett]

[ QUOTE ]
Clearly a great long term buy. BUt is this the right entry point? Not clear.

[/ QUOTE ]
If it is clearly a great long term buy, why do you care about your "entry point"? Let's say that 10 years from now the stock is at $132. This is a ~12% pre-tax CAGR, excluding dividends, making your initial $10,000 investment worth $30,000. If you wait for the stock to get cheaper, let's say you are able to buy it at $40 in 6 months. Your $10,000 grows to $10,170 in 6 months (ING savings account), then you buy WMT which grows to about $33,500, about 12% higher than $30k. Of course, with dividends the gap would be a little smaller than 12%, and with a holding period longer than 10 years it would be smaller still. If it's clearly a great long term buy, I don't see why trying to get in at the chart's precise bottom is that big of an issue.
-web

[Girchuck]

But the price of fuels affects Walmart distribution networks as well.
They are already as efficient as they can be, and higher transportation costs will force Walmart to raise its prices

[AceHigh]

[ QUOTE ]
Play devil's advocate.
What am I missing? What's holding this stock back?

[/ QUOTE ]

Walmart's management constantly over promises and underperforms. For some reason they like to predict higher earnings than they are likely to get and usually miss. I know it doesn't seem like that big of deal, but Wall Street likes companies that make there estimates.

Oil/Energy prices. Who shops at WMT? Mostly people who can't afford to shop at other places. These people are going to be most hurt by the rising cost of gas and heating there houses. They are going to lose a larger percentage of income to energy costs than the more affluent shoppers.

[adios]

[ QUOTE ]
In a rough sense if you look at WMT chart, it almost looks like 1 year down, 1 year up, 1 year down, 1 year up for the past 5 years. Why? Kind of a strange graph.

[/ QUOTE ]

WMT a highly owned, highly liquid stock. FWIW stocks that are widely followed should trade in some sort of range long term due to the nature of equity valuation. Also FWIW I believe that WMT price is reflective of a higer risk premium due to the uncertainty of the effect of higher energy prices on consummers. I like your approach in looking at long term price movements and historical PE's. Basically the info you've provided shows it's probably a good long term trade. Just sell at the top of the trading range.

[adios]

[ QUOTE ]
It may take disposable income out of the hands of people but people will still be buying soap, toothpaste, toliet paper, soft drinks, etc.

[/ QUOTE ]

Consumer non durable spending is what you're citing here and I whole heartedly agree that the underlying strength in this type of spending is more or less "recession" proof. It's funny to hear talk of a recession though when all signs point to a strong U.S. ecnomy. Inflation is the current Wall Street scare IMO and there's actually good reason for that.

[buffett]

[ QUOTE ]
constantly over promises and underperforms

[/ QUOTE ]
Color me doubtful.

Please cite at least 5 examples of this happening over the last 5 or 7 years, and then I might believe this.

In 2003 Warren Buffett cast his vote in Fortune's Most Admired Companies list for Wal-Mart, and I seriously doubt he would do this for a company that "constantly overpromises and underdelivers."

-web

[buffett]

[ QUOTE ]
stocks that are widely followed should trade in some sort of range long term due to the nature of equity valuation

[/ QUOTE ]
Please expound on this, especially the part about "due to the nature of equity valuation."

Perhaps I'm misunderstanding you, but I think the following 5-year charts should disabuse anyone of believing what I think you're saying:
Time Warner (http://finance.yahoo.com/q/bc?s=TWX&t=5y)
GE (http://finance.yahoo.com/q/bc?s=GE&t=5y&l=on&z=m&q=l&c=)
Cisco (http://finance.yahoo.com/q/bc?s=CSCO&t=5y)
Exxon (http://finance.yahoo.com/q/bc?s=XOM&t=5y)
Pfizer (http://finance.yahoo.com/q/bc?s=PFE&t=5y)
-web

[adios]

What I wrote:

[ QUOTE ]
stocks that are widely followed should trade in some sort of range long term due to the nature of equity valuation

[/ QUOTE ]

What I didn't say that you seem to want to pin on me:

[ QUOTE ]
stocks that are widely followed always trade in some sort of range long term due to the nature of equity valuation

[/ QUOTE ]

Stocks are valued based on future earnings discounted for the cost of equity (risk premium as a function of the stocks beta, the market risk premium and the risk free rate of return). If the market "knows" future earnings growth perfectly then stocks should only vary due to the percieived risk, changes in market risk premium and the risk free rate of return. Due to the expontential nature of earnings growth and that stocks are valued to perpetuity changes in all of the factors mentioned can influence stock prices a great deal. Throw in the uncertainty of future earnings growth and there's a constant "debate" if you will about all of the factors mentioned and thus stock valuations will fluctuate.

Discounted Cash Flow Model (http://www.investopedia.com/terms/d/dcf.asp)

This link refers to WACC the weight cost of capital. When valuing a firms equity only though one should use the cost of equity. The cost of equity is determined by the Capital Asset Pricing Model:

CAPM - Determining the Cost of Equity (http://www.moneychimp.com/glossary/capm.htm)

Vary the numbers slightly and you'll see that valuations can vary quite widely. It stands to reason that with a company such as Walmart the predictability of earnings is a lot more reliable than a company that doesn't have any analyst coverage to use an extreme example. If the market risk premium stays fairly constant, the risk free rate of return doesn't vary too much, and the beta for a stock remains fairly constant then it stands to reason that the "debate" about valuation will be focused on what the future earnings really are for a company.

As far as the market being overvalued, I can offer reasons why this happened but we really don't know for sure. That's probably a topic for a separate thread. But whatever reason I come up with, I can use a number that will make the valuation over the five year periods seem "rational." The point is that given that WMT is a widely followed company, the debate about earnings should lead to a trading range that is fairly predictable given that the market risk premium stays fairly constant, the beta remains fairly constant, and the the risk free rate of return stays fairly constant.

[squiffy]

My only worry right now, with WMT, is that we may be headed into a recession. And in 2001,though WMT actually went up at some points during the recession, it eventually ended up lower.

But I am not sure how likely a recession is.

[squiffy]

Inflation rising, oil prices rising, spending on Iraq war 7 billion per month, Afghanistan 1 billion per month, car sales declining, home sales declining, interest rates rising, inverted yield curve, possible rise of China's military might, possibility of Mideast War someday reducing oil supplies, GM pension underfunded, Ford doing poorly, airlines going bankrupt.

Hey, nothing to worry about. The American economy is always doing well. And you can never lose money in stocks.

Yeah, right.

I would ask exactly the opposite question. Why aren't you worried about a recession.

[squiffy]

hurricane Katrina, the Florida hurricane, earthquake in Pakistan.