Wal-Mart Gets Boost from Stimulus Checks
Wal-Mart Stores, Inc. (WMT) on Thursday reported an impressive same-store sales gain for June, a trend also seen at other value-oriented retailers such as Target and Costco. These reports offer some evidence that consumers are indeed spending their government-issued stimulus checks. Wal-Mart’s numbers were particularly impressive as the Bentonville, Arkansas-based retail giant reported a 5.8% jump in same-store sales—a whopping increase not seen at WMT in many years. The company had forecast same-store sales gains of two to four percent, so this was a very impressive out-performance and should help boost the company’s stock, which has enjoyed a nice run of late after years of stagnancy.
For years, market prognosticators had maintained that WMT shares would be a good defensive position in an economic downturn. During much of that same period, shares of the venerable retailer had been dead money as the stock languished for years as the stock transitioned from that of a go-go growth story to that of a massive, fully mature and lumbering behemoth. Wal-Mart’s management has struggled for years to try to reignite the stock’s former appeal. Attempts were made to emulate Target’s more upscale merchandising with minimal success. However, over the past year or so, management’s efforts to boost same-store sales results back to a level which one would expect from a growth stock are starting to pay off. Furthermore, these efforts dovetail perfectly with the stalling economy.
Wal-Mart’s laser-like focus on keeping costs down and offering the best everyday value to consumers are paying off in a tough economy. More than ever, shoppers are looking for bargains and this plays right into WMT’s wheel house. Year-to-date, the shares are up over twenty percent, which is almost a mirror image of the negative returns turned in by most major domestic stock indices over the same time period.
Ockham Research has maintained a strong buy on WMT shares for quite some time. The almost decade-long stagnancy in the stock coupled with solid year-over-year earnings growth compressed once lofty multiples and gave us an appealing entry point for the world’s largest and—all things considered—one of the best run retailers. Despite the solid performance of the past year, WMT stock still trades at a price-to-sales level of 11.46 (while its historic price-to-sales range is 13.02 – 17.45). Its price-to-cash flow is .576 (while the historic range is .64 - .86). Thus, using these metrics, if WMT were to move back to just the lower end of its historic price-to-sales and price-to-cash flow figures, it should trade in the mid-sixties—a level twelve percent higher than its current price. Ockham views WMT shares as a good defensive position in a rocky and uncertain economy with long-term appreciation potential in any economic environment.
Ockham Research Staff @ July 10, 2008