Should I Buy Wal-Mart? 3 Pros, 3 Cons

by Tom Taulli | August 16, 2012 10:50 am

[1]In the latest quarter, Wal-Mart (NYSE:WMT[2]) posted earnings of $1.18 per share, which beat the Street estimates by one penny. However, the revenues were somewhat light at $113.53 billion. The consensus estimate was for $115.8 billion. On the news, the shares of Wal-Mart are off so far today by almost 3.5% to $71.85.

Despite all this, the overall share-price gains for 2012 are still impressive, coming to over 20%. It certainly helps that the company has been posting decent growth in comparable-store growth (sales at stores open a year or more).

But can the stock price be vulnerable right now? Or is today’s dip an opportunity? To see, here’s a look at the pros and cons:

Pros

Massive Scale. Wal-Mart is the world’s largest retailer, with over 10,100 locations in 27 countries. The company serves customers more than 200 million times a week.

E-commerce. This is a huge opportunity for Wal-Mart. Over the years, it has been investing heavily in its digital business. For example, the company has a system that allows customers to buy online and pick up those purchases at retail locations. It also has thriving websites in places like Brazil and Canada.

Strong Financials. Wal-Mart is a cash machine. In the first six months of 2012, free cash flows came to $6.1 billion. This compares to $4 billion during the same period a year ago.

A key has been Wal-Mart’s continued focus on cost-cutting and productivity improvements.

Cons

Macroeconomy. Many of Wal-Mart’s customers live paycheck-to-paycheck. Unfortunately, job growth remains anemic, and food prices likely rise because of the Midwest drought[3].

The slowing in global markets is also having an impact on Wal-Mart. In fact, the company plans to pull back on its expansion plans.

Competition. Major players like Target (NYSE:TGT[4]) and Costco (Nasdaq:COST[5]) continue to put pressure on Wal-Mart. But it also faces fierce competition from the dollar stores like

Family Dollar (NYSE:FDO[6]), Dollar General (NYSE:DG[7]) and Dollar Tree (NASDAQ:DLTR[8]). And yes, e-commerce operators like Amazon (Nasdaq:AMZN[9]) represent another big threat.

Legal. The U.S. government is investigating Wal-Mart on allegations of bribery, tax evasion and money laundering in its Mexican operations. It’s too early to get a sense of the impact, but the company’s reputation has already suffered. The investigation will also likely stunt Wal-Mart’s growth in Mexico.

Verdict

For the past year, Wal-Mart has posted solid results. But the latest quarterly report is ominous. The macroeconomy appears to be taking a toll — and it’s unclear how long this will last.

At the same time, Wal-Mart’s stock isn’t cheap, with a price-to-earnings ratio of 16. The dividend is also a somewhat meager at 2.1%. In light of all this, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[10], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[11] and “All About Commodities.”[12] Follow him on Twitter at @ttaulli[13]. As of this writing, he did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/08/should-i-buy-wal-mart-3-pros-3-cons/

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