Streetwise

Lauren Rudd

Sunday, September 18, 2011

Yes, I Really Do Like Wal-Mart

It is funny how some people always seem to interpret what I write in a manner far removed from what was intended. My recent references to becoming a Wal-Mart greeter were not designed to disparage Wal-Mart or its greeters. On the contrary, I like Wal-Mart, 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. Therefore, one of the key points I try to emphasize in many of these columns is that investing on Wall Street is critical, although not a guarantee unto itself, to setting yourself up to enjoy a successful retirement.

Moreover, 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.

Wait, you say, am I really advocating that anyone in his or her right mind would invest in today’s stock market? Absolutely I am! Understand 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, not market emotions.

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 personally acceptable defined period of time measured in months or years.

To that end, you will need to find those corporations with winning records of accomplishment that sell products you understand, which brings us back to Wal-Mart (WMT).

On August 16, Wal-Mart reported fiscal 2012 second quarter earnings from continuing operations of $1.09 per share, up 12.4 percent over the $0.97 per share from the same period a year ago. Net sales for the quarter were $108.6 billion, an increase of 5.5 percent from a year ago but included a currency exchange rate benefit of $2.3 billion.

Wal-Mart also reported positive free cash flow of $4.0 billion, as compared to $4.5 billion in the prior year. Return on investment (ROI) for the trailing 12 months ended July 31 was 18.4 percent, as compared to 19.0 percent for the prior year, being negatively impacted by acquisitions and currency exchange translations.

Looking ahead, Wal-Mart's earnings per share (EPS) guidance for its third quarter is between $0.95 and $1.00 per share as compared to an EPS of $0.95 a year ago, which included a tax benefit of approximately $0.05 per share.

Full year guidance was raised to between $4.41 and $4.51 per share under the assumption that currency exchange rates remain at current levels. This compares to last year's $4.18 per share, which included approximately $0.11 per share for certain items.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 11 percent applied to earnings of $17 billion and a discount rate of 15 percent, yields a value of $88 per share. The more conservative free cash flow to the firm model yields an intrinsic value of $99 per share. The shares recently closed at $51.59.