Wal-Mart [NYSE:WMT - $53.40] is the world’s largest retailer with almost $406 billion in FY 2010 sales (FY ended Jan. 31, 2010). Despite the poor economic conditions WMT posted all-time record sales and earnings last year.
Here are the excellent long-term per share numbers for WMT as reported by Value Line:
FY | Sales | C/F | EPS | Div. | B/V | Avg. P/E |
2001 | 42.80 | 2.05 | 1.40 | 0.23 | 7.01 | 38.0x |
2002 | 48.91 | 2.25 | 1.50 | 0.27 | 7.88 | 34.9x |
2003 | 55.64 | 2.61 | 1.81 | 0.30 | 8.95 | 30.3x |
2004 | 59.46 | 2.95 | 2.03 | 0.35 | 10.12 | 26.9x |
2005 | 67.36 | 3.47 | 2.41 | 0.48 | 11.67 | 22.8x |
2006 | 75.01 | 3.78 | 2.63 | 0.58 | 12.77 | 18.3x |
2007 | 83.51 | 4.27 | 2.92 | 0.65 | 14.91 | 16.0x |
2008 | 94.27 | 4.83 | 3.16 | 0.83 | 16.26 | 14.9x |
2009 | 102.23 | 5.16 | 3.42 | 0.93 | 16.63 | 16.2x |
2010 | 106.80 | 5.57 | 3.70 | 1.09 | 18.56 | 14.2x |
Consensus views for FY 2011 and 2012 are now running $3.99 and $4.38 respectively putting Wal-Mart’s multiple at< 13.4x this year’s and 12.2x the FY 2012 expectations. Those are both lower than any P/E on the chart above listing the past decade’s data.
Even better, Wal-Mart receives Value Line’s top ratings for ‘safety’, ‘financial strength’, ‘stock price stability’ and ‘earnings predictability’. Total interest coverage is almost 11x and the well-covered dividend has been raised each year to the present level of $0.2725 quarterly for a current yield of 2.04%.
These low volatility shares (Beta = 0.6) haven’t gone anywhere since peaking at $70.30 back in late 1999. Since then EPS have surged by 189% going from $1.28 to $3.70. Dividends have grown by 473% over that same period (from $0.19 to $1.09 annually).
While the high multiples of the 1998 – 2002 period may never return it doesn’t seem justified to think we won’t see at least a 15 P/E sometime in the reasonable future. That multiple would lead to a 12-month target of close to $60 and a two-year goal of over $65/share.
Are those rational expectations? Sure. Standard and Poors rates WMT as a ‘5-Star’ issue and views present day ‘fair value’ as $58.20 with a 12-month $62 price projection. Morningstar has a ‘4-Star’ ranking and sees today’s ‘fair value’ as $60 based on trailing 12-month fundamentals.
Certainly, Wal-Mart has never been offered at a better valuation than it is presently. I’d have no problem simply buying the shares and looking for 10% - 15% minimum annualized returns. There’s an even nicer way to play for those of you that are comfortable with selling naked puts as a way to either buy ‘below the market’ or to ‘get paid for not buying shares’.
Consider writing (selling) some 2011 or 2012 LEAP Puts on WMT…
Net Cost If Exercised | Margin of Safety | |
Sell Jan. 2011 $55 Puts @$5.05 /sh. | $49.95 /sh. | 6.46% |
Sell Jan. 2012 $60 Puts @$10.35 /sh. | $49.65 /sh. | 7.02% |
Sell Jan. 2012 $65 Puts @$14.20 /sh. | $50.80 /sh. | 4.87% |
By selling any of the above puts you would be committing to buy WMT shares at prices ranging from $49.65 - $50.80 (depending on the specific put selected). If WMT shares finish above the selected strike price by the January 2011 or 2012 expiration dates (as I expect they will) you would simply pocket the premiums without buying any shares.
Maximum upside is the amount of premium received upon the sale of the puts. Maximum risk is to buy the contractual amount of shares (100 shares /contract sold) at the net exercise price.
In a worst-case scenario you end up buying high-quality, decent yielding shares at a better entry price than is available today (with a 4.8% - 7% cushion before any losses would occur).
Disclosure: Author is long WMT shares and short WMT options.
