Streetwise

Lauren Rudd

Sunday, September 16, 2012

Never Lose Faith

No one should be forced to spend their golden years working at subsistence level positions in order to survive. Therefore, I continually emphasize that investing, although not a guarantee unto itself is significant to enjoying 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 absolute size of your portfolio is not nearly as important as your contributing to it on a regular basis.

Wait, you say, am I really advocating investing in today’s stock market given its nosebleed levels and continual talk of a decline going forward? 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, whereas the performance of a company’s shares will mirror its financial performance.

Unfortunately, too many investors 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.

Yes, it is natural to lose faith when the market’s judgmental outlook is negative. Volatility and uncertainty are frightening. 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 what you have defined as an acceptable period of time, be it 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 to stogy old Wal-Mart (WMT).

A year ago when I wrote about the company, the shares had recently closed at $51.59 and my earnings estimate for fiscal 2012 was $4.55 per share with a 12-month target price on the stock of $60 for an annualized capital gain of 15 percent. There was also a 2.80 percent dividend yield. So how did the company do over the ensuing year?

Earnings for the fiscal 2012 year were $4.49 per share, while the shares recently closed at $74.07. Although earnings were 6 cents lighter than I had estimated, the share price well exceeded my forecast, providing a capital gain of 43.6 percent.

So how will Wal-Mart fare going forward? Given the continuing economic pressures on the paychecks of Main Street, Wal-Mart's price leadership continues to grow, as evidenced by their most recent results.

For fiscal 2013’s second quarter ended July 31, Wal-Mart reported net sales of $113.5 billion, or an increase of 4.5 percent from the $108.6 posted a year ago. Income from continuing operations was $4.0 billion, up 5.7 percent from a year ago, while earnings per share came in at $1.18, as compared to $1.09 a year ago.

Wal-Mart chalked up free cash flow of $6.1 billion for the six months ended July 31, as compared to $4.0 billion a year ago. Return on investment (ROI) for the trailing 12 months ended July 31, 2012 was 18.1 percent, compared to 18.4 percent for the prior period. The decline in ROI is attributable to higher levels of average working capital, capital expenditures and the impact of acquisitions.

Management raised and narrowed its full-year earnings guidance to $4.83 to $4.93 per share. The previous range had been $4.72 to $4.92. As stated previously, last year's full-year EPS was $4.54.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 9.52 percent applied to earnings of $16.4 billion and a discount rate of 15 percent, yields a value of $77 per share. The more conservative free cash flow to the firm model yields an intrinsic value of $100 per share.