It’s been quite a ride for long-term Wal-Mart (WMT) shareholders. Since it’s meteoric rise in the early 1990’s (rising over 1000% by the year 2000), shares spent the next decade roughly flat.
Even through this flat period, the company was still growing at an impressive rate. While the underlying financials continued to improve, the stock spent almost 10 years simply growing into its incredibly high valuation multiple.
The charts below demonstrate that while Wal-Mart grew EPS nearly every year, the multiple contraction was enough to offset any financial growth, leaving the share price roughly unchanged.
Over the past five years however, the story has been the exact opposite. While earnings growth has flat-lined, the stock has gone from $50 to a peak of $90, while its p/e multiple has expanded from 12.5x to a peak of 17.5x.
With both the current price and earnings multiple nearing 52-week lows, how do shares look moving forward?
The Business
Operations comprise three segments: Wal-Mart U.S., Wal-Mart International and Sam's Club. The company operates stores in U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico and the United Kingdom.
It may be surprising, but Wal-Mart is primarily a grocery store when looking at the sales breakdown. 56% of all sales come from groceries while another 11% are from health and wellness products.
In addition, the company is reshuffling management positions as it eyes making fresh food a top priority at the company. The development follows news from earlier this month that Target is giving fresh and healthy food a larger presence in store aisles at the expense of some packaged food brands. Wal-Mart is also testing an online grocery order pickup service in some markets to keep an edge on Target and Costco.
Where Will Growth Come From?
With its domestic U.S. market fairly penetrated, future revenue growth should be dependent on growing same-store-sales through their renovation plans, and more importantly, growing internationally.
Domestic Growth: WMT recently opened 165 traditional format Neighborhood Markets and 68 smaller Neighborhood Markets. The neighborhood market format was introduced a year ago, targeting customers in closer communities with convenient access to grocery shopping, daily use food items and health-related items.
The company also plans to open 180 to 200 Neighborhood Markets, out of which 10 to 15 will be based on a smaller format. The smaller format will help the company expand its footprint in smaller locations, which in turn helps the company cater to the needs of the surrounding population.
International Growth: The company’s international segment will be the key growth driver as U.S. growth remains relatively stable and slow. Revenues from international markets have increased by an average 15% annually over the last couple of years due to aggressive expansion and Wal-Mart’s low price advantage.
In comparison, the retailer’s revenues in the U.S. have grown at an annual rate of just 1% during the same period.
International sales currently comprise roughly 30% of sales. Emerging markets provide significant and underpenetrated growth opportunities.
In its international operations, Wal-Mart faces competition from other multinational and local supermarket and hypermarket chains including Carrefour (CRRFY) in France, Metro (MTRAF) in Germany, Tesco (TSCDF) in the United Kingdom, Loblaw Companies (LBLCF) in Canada, and Ahold (AHONY) in the Netherlands.
Still, Wal-Mart’s international revenue is growing fast. International revenue grew 7.3% annually from 2009-2014 to $137 billion. That makes the International segment the fastest growing revenue segment. Overall, Wal-Mart’s revenue growth came in at a slower 3.4% over the period.
Over half of all sales growth and over half of operating income growth is expected to come from international markets.
Valuation
For the current year, analysts are expected WMT to have EPS of $4.79.
Over the next five years, analysts are expecting growth of roughly 4.3%, just a tad below the previous five-year rate.
Using GuruFocus’ DCF Tool, we can estimate what growth rate investors are currently pricing into shares. At an 8% discount rate (which is justified by the businesses long-term history of stable and predictable growth), we can estimate that less than 3% of annual EPS growth is currently priced in. This is lower than the company’s 10-year, 5-year, and 1-year average.
If we assume that EPS grows at analyst estimates of 4.34% over the next ten years and then reverts to a steady state 3% annual growth (around world GDP), shares look to be roughly 10% undervalued.
Conclusion
While Wal-Mart is not the most exciting company and is facing an increasingly over-penetrated domestic market, the valuation is incredibly reasonable at current prices. While there isn’t an incredible amount of room to make large amounts of money, investors could do a lot worse in a market that is over 30% above its historical mean and median valuation levels.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
