Morningstar

Wal-Mart Withstands Competitive Headwinds

The retailer looks fairly valued as it posts its eighth consecutive quarter of same-store sales growth.

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Walmart Inc
(WMT)

Our $75 per share fair value estimate for wide-moat

Beyond its home turf, Wal-Mart’s international business chalked up 2.2% underlying sales growth, with the firm posting positive comps in Mexico, Canada, and Brazil. However, the U.K. continues to struggle at the hand of intense price competition--pressure that we don’t expect to abate in the near term. In the aggregate, we forecast Wal-Mart to generate 3%-4% sales growth outside the U.S. over our 10-year explicit forecast.

Due to continued investments in higher wages and e-commerce, adjusted operating income edged down 30 basis points to 4.7%. But despite the near-term hit to profitability, we think that this spending is prudent, particularly given the threats Wal-Mart faces from competitors (namely Amazon) that are also investing aggressively.

Management bumped up its full-year earnings per share guidance to $4.15-$4.35 (from $4.00-$4.30), but our outlook ($4.18) is still within the company’s revised range. Over the longer term, we believe Wal-Mart’s cost edge will enable it to leverage 2% total sales growth to sustain 5% operating margins (versus a 5.8% 10-year historical average) once its investments moderate over the next few years. Shares trade in line with our valuation, though, and we’d suggest investors await a more attractive entry point.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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