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Is Wal-Mart a Good Stock to Buy?

 Wal-Mart Stores, Inc. (NYSE:WMT), after underperforming in the first quarter, still manages to outpace the S&P 500 and is up over 25% year to date, compared to the S&P’s 14%. With revenues expected to be up 6% next year, due to 8% growth in international sales, the company continues to excel despite global economic weakness. Many investors are seeing Wal-Mart as a safe haven that can provide protection against a decaying economy, but also a stock that can perform positively in a rebounding economy.

Warren Buffett

Wal-Mart is a Warren Buffett favorite, but also a favorite of Boykin Curry and George Soros. All three of these managers had over 4% of their fund’s 2Q 13F portfolio invested in Wal-Mart. Jim Simons took a new found interest in Wal-Mart during the second quarter, increasing his stake over 2,000% to 3.7 million shares.

The one company that seems to be slowing every retailer down is, Inc. (NASDAQ:AMZN). Wal-Mart took a direct stab at Amazon last month when it announced that it would no longer sell Amazon’s Kindle e-readers and tablets. However, even though Amazon is being blamed for various poor performances of retail companies, including Best Buy, only about 7% of total U.S. retail sales were e-commerce transactions in 2011. Forrester expects this number to rise to 9% in 2016.


Apart from Amazon, Wal-Mart sees competition from Target Corporation (NYSE:TGT) on a broad basis, being Wal-Mart’s toughest competitor on a department retail store basis. The company has seen positive boosts in same store sales, which is expected to be up 3.6% in 2013. Target has lagged Wal-Mart with adoption of food, but Target now plans to remodel its stores to its ‘PFresh’ format. This will add fresh foods to Target stores and should be a key driver for adding value to customers and traffic to Target’s stores, which is expected to allow the company to grow sales 6% in 2013.


However, Wal-Mart is also seeing competition from other companies such as Costco Wholesale Corporation (NASDAQ:COST), which directly competes with Wal-Mart’s Sam’s Club. The membership wholesale company is not up as much as Wal-Mart year-to-date but continues to meet consensus estimates and saw EPS estimates for 2013 raised by $0.05 to $4.47. Earlier this week the company posted it latest fiscal quarter results, with sales and operating income higher than expected. S&P recently raised its price target to $113 on strong customer traffic and membership renewals; the company currently trades around $97.50. Although Costco is a strong and growing company, with almost $5 billion of cash on hand, compared to debt of only $1.5 billion, we like Wal-Mart much more, as Wal-Mart has a wholesale membership arm and can tap a much broader customer base.

Also worth noting is the rising popularity of discount retailers, including Dollar General Corp. (NYSE:DG). Dollar General, thanks in part to a weak economy, expects sales to be up 9% for 2013 and 5.2% same-store sale increase. Dollar General trades a trailing P/E of 19, but a forward P/E of 14, which is indicative of the company’s planned expansion into California and the Northeast.

The biggest headwind for Wal-Mart is the increasing number of Internet users, which bodes well for Amazon. Wal-Mart’s biggest effort to slow Amazon down was to cease selling Amazon’s Kindle in its stores. The new Kindle version allows for the browsing and purchasing of merchandise via Amazon’s site, and so the move is more strategic than it appears.

From a valuation standpoint, Wal-Mart and Target trade in line with similar P/E and P/S ratios, and dividend yield. However, Wal-Mart dominates with respect to revenue generation, generating over 6 times the revenue that Target does. We believe that Wal-Mart is a solid investment given its diversity, namely its ability to appeal to a variety of consumers regardless of the economic situation.

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