Streetwise for Sunday Sept. 20, 2009

Streetwise

Lauren Rudd

Sunday, September 20, 2009

Walmart Redux

It is funny how some people will interpret what I write in a manner far removed from what was intended. My reference last week to becoming a Walmart greeter was not designed to disparage to Walmart or their greeters. On the contrary, I like Walmart, its shares, its management and the fact that they are willing to offer employment to the elderly and disabled.

Nonetheless, no one should be forced to spend their golden years working at subsistence level positions in order to survive. However, one reader took what I wrote as an affront to Walmart. Interestingly, this individual is comfortably retired, due in no small part to his investments. That is exactly my point. Investments are key, but not a guarantee to a successful retirement.

Furthermore, investing is not rocket science. Virtually everyone can do it with minimal assistance. A casual understanding of economic trends, a little basic finance to analyze earnings and a dollop of common sense will enable you to establish a portfolio with a reasonable return. The key is to contribute to your portfolio regularly.

To stay out of trouble, remember that short-term price trends on Wall Street are merely an indication of the market’s emotional mood at a particular point in time. However, over time the performance of a company’s shares will mirror its financial performance.

Unfortunately, too many investors, professional and amateur alike, are wedded to the rear view mirror concept. That is wrong. While the past plays a role in stock selection, it is a company’s projected performance going forward that should drive your investment decision.

At the same time it is natural to lose faith when the market’s judgmental outlook is negative. Yes, volatility and uncertainty are frightening, even to seasoned investors. Nonetheless, you need to constantly remind yourself that investing is not about how your portfolio performed yesterday, or how it will perform tomorrow. Rather it is about your success over a period of three to five years.

Therefore, you need to find those corporations with winning records of accomplishment that sell products you understand, which brings us back to Walmart (WMT).

At the end of each quarter, Walmart’s sales are either up or down, as are its profits. You then judge whether Walmart is well positioned going forward. If you believe the answer is yes, you might want to investigate Walmart as a possible investment in more detail.

To assist you in your analysis, consider that on August 13, Walmart reported earnings of 88 cents per share, exceeding Street expectations. Net sales for the second fiscal quarter were $100.1 billion. Currency exchange rates reduced international sales for the quarter by approximately $4 billion. Consolidated operating income was $5.9 billion, up 1.2 percent, with income from continuing operations before income taxes up almost 1.0 percent.

Free cash flow for the first half of the year exceeded $4 billion. Return on investment (ROI) from continuing operations for the trailing 12 months ended July 31, 2009 came in at 18.4 percent, as compared to the 19.4 percent a year ago. The decline was the result of foreign exchange, a legal accrual and the impact of Walmart’s acquisition of D&S in Chile.

Looking ahead, Walmart’s guidance for the third quarter of fiscal 2010 is for between 78 and 82 cents per share. Guidance for the full fiscal year was increased to between $3.50 and $3.60 per share.

The intrinsic value of the shares, using a discounted earnings model with a discount rate of 15 percent and an earnings growth rate of 10.9 percent applied to earnings of $13.4 billion, yields a value of $62 per share. The more conservative free cash flow to the firm model provides us with an intrinsic value of $75 per share, as compared to the recent price of $49.90 per share.