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Eric Houssels
Eric Houssels
Articles 

Walmart: How Can All These People Be Wrong?

December 22, 2006 | About:

Walmart (WMT) – the word itself evokes emotion. Many people admire the company, its story, its relentless quest for efficiency. More, arguably (or should I say more audibly), have come to disdain it for very much the same reasons – its relentlessness has forced the culture of the charming, moms-and-pops shopping experience into near-bankruptcy. The investment community, while rarely subject to much of a sentimentalism risk, has weighed in heavily on the negative side in recent months.

The recent charges out of Wall Street include: same-store-sales have disappointed in the 0-2% range; the move to the high-end was a bust; they have failed / are failing in their bid for international expansion; and last, but certainly not least, they are simply too large to grow materially in the US anymore. I acknowledge the legitimacy of these concerns, some more than others. Walmart is large and it will be more difficult to grow domestically in a significant way. Korea and Germany were not successful but other countries, like Mexico, have been smashing successes. Organic produce at the local Walmart never lit my fire, but I still, nonetheless, tip my hat to them for being open-minded enough to experiment with it. As for the whole same-store-sales obsession, I simply refer you to Eddie Lampert’s 2005 Sears Holding annual letter for the sound logic and arithmetic behind why the same-store-sales metric is, more often than not, complete and utter nonsense.

Concerns acknowledged and somewhat legitimated, somewhat refuted, I decided to visit my local Walmart to see and feel the situation firsthand. I do confess to making my trip giddily armed with the fact that Walmart, a once-in-a-century success story, was trading at a languishing 14.4x forward earnings. What did I find?

Cars in the parking lot, lots of them. People in the store, lots of them. I found a store reasonably in order given the unbelievable, absolutely unbelievable, amount of trade volume going through it. I found, to my admitted pleasant surprise, a clean, accessible restroom that would not deter even the neatest of neat-freaks. Most significantly, however, I found shopping carts loaded up with both the season’s generosities as well as the people’s daily requirements. From these findings, I began to ponder the title of this piece: how can all these people be wrong?

My answer to this question is simple: they are not wrong at all. Arnold Van Den Berg, in an interview in the August Outstanding Investor Digest, makes the case for Walmart from the fact-based perspective. Walmart’s grocery prices are 17-29% less than other supermarkets, providing the average household with savings of $2,300 per year! Worried about the rise in gas prices, offset this by shopping at Walmart. Want to pay for little Johnny’s college education 15 years down the road, buy his food at Walmart and contribute to his 529 plan with the “profits.” Don’t have enough savings to fund your own annual retirement contribution, switch to Walmart and you will.

If it is the infamous Walmart labor practices that are preventing you from acting in you and your family’s rational best interests (note that the “all these people” of my visit did not appear to have this hang-up), bear in mind that Walmart’s average full-time hourly employees earn nearly double the federal minimum wage at $10.11, which is more than 2 bucks more than what H&R Block pays, and receive health insurance after only six months’ employment while part-timers at Walmart, contrary to urban legend, do begin receiving health insurance after two years. Walmart did purchase $18 billion worth of merchandise from China in 2004 (apparently this has become something to be ashamed of); ah, but the facts are annoyingly stubborn for Walmart detractors on this issue as Walmart purchased $150 billion worth of goods from 61,000 US suppliers and, in so doing, supported over 3 million US supplier jobs in addition to their 1.3 million direct US workforce. And in case you were wondering about Walmart’s corporate citizenship…the company’s tax payments exceeded $5.5b in 2004, while, in 2005, those greedmongers from Bentonville dipped into shareholders’ pockets and contributed over $200 million to charity.

How can all these people be wrong? The millions of shoppers each saving thousands of dollars per year are not wrong. The millions of employees contributing to their own family’s well-being in a material way are not wrong. Now, it does remain to be seen whether investors, concerned over future growth and comparative advantage deterioration, and willing to discard WMT at the historic low multiple of 14.4x earnings, will be wrong or not. At that price, at this risk-reward point in time, I side with the shopping carts. Walmart LBO, anybody?

About the author:

Eric Houssels
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.3/5 (24 votes)

Comments

vooch
Vooch - 10 years ago    Report SPAM
I bought some more Wal-Mart this week at $46.00.

I got the stock on sale, imo. hehe

- Vooch

sgeranpa
Sgeranpa - 10 years ago    Report SPAM
Yeah, I have been buying more too. I just can't fathom why its so cheap. I keep looking for value plays and keep coming back to wmt. It could easily sport a P/E of 25.
jaumepared
Jaumepared - 10 years ago    Report SPAM
WMT great company and great prospects, but size is starting to be a detriment. Trees don't gow to the sky and management does not have the same vision and passion. Maybe they need to break into three pieces: Walmart, aDistribution company and Sam's Club's. Maybe a real estate entity as well. Each store needs to have more accountability and entrepenurial drive......imho
vooch
Vooch - 10 years ago    Report SPAM
I drove by the Wal-Mart WMT parking lot last night around 8:00pm and it was almost completely empty. Two cop cars parked together talking, and a handful of others, some with people, some without.

I should have taken a picture because it was the first time I've seen that parking lot so empty.

Of course, it was the night of Christmas Eve and they were closed... hehe

- Vooch

freehling
Freehling - 10 years ago    Report SPAM
Not only would you be siding with the shopping carts, you'd be siding with the best investors in the world, who all seem to own WMT having bought at current prices. This includes Joel Greenblat with about 50 percent of his assets in the company.
vooch
Vooch - 10 years ago    Report SPAM
I bought more WMT today at $45.66 along with NOK, SNY, and VLO.

I sold out of DG, DELL, and LPNT - all for a loss. I was also going to sell PSUN, but that one is still hanging in there on my valuation criteria.

- Vooch

ehoussels
Ehoussels - 10 years ago    Report SPAM
Jaumepared - these are good points that you raise. It is interesting to ponder when size in general really starts to impede growth both internally, via overly burdensome controls, and externally, via lesser meaningful opportunity as well as governmental rivalry. I like the "odds" that are currently being quoted on Walmart and this is what pushes me over the edge; however, I acknowledge your size argument, as well as your management critique although I feel less qualified to speak on this. I do not like financial solutions for the most part; however, if a break-up is an attempt to solve the size issue and is not done just to extract higher multiples, I would furthermore support its consideration.
vooch
Vooch - 10 years ago    Report SPAM
If the company is earning a ton of money, which they are, they can buy back the stock, if it's priced right, which it is.

Then there's the global growth situation. WMT's future is in China and abroad.

WMT has already planted seeds in China.

I don't see much downside risk with this stock right now.

- Vooch

sgeranpa
Sgeranpa - 10 years ago    Report SPAM
The same "they are too big" argument could have been made at 100b and 200b revenue points.

But less assume that they don't open a single new store anymore. You'll still get the current 6% earnings yield + 3% long term economic growth + 2% long term inflation, for a total long term return of 11%. Thats a heck of return for a safe investment. Arnold Van Den Berg in a recent article said that if he had to buy only one stock right now, it would be wmt.
mikeyp
Mikeyp - 10 years ago    Report SPAM
awesome.. I'm in, some nice bargains to be had with these large caps.
c_896
C_896 - 10 years ago    Report SPAM
its a bell weather stock i too have bought some. its a cheep stock on the trade
kelliots
Kelliots - 10 years ago    Report SPAM
Wall mart is a crappy company that is sending US jobs offshore, see the Frontline TV show.
visible
Visible - 10 years ago    Report SPAM
In that same OIP article, Arnold Van Den Berg discussed the emotions of buying, To paraphrase his identification of buying emotions:

apathy - price drifts down (valuation improving)

disgust - investors looking to sell on an uptick price that the asset never reaches (asset fairly to slightly undervalued)

fear - sell at any price (stock undervalued)

hate - "I'll never buy that stock again" (a margin of safety).

You can't invest on the emotions alone, but when a good company (like WMT) starts to move thru these emotional states, the value investor is presented with a buying opportunity.

As Warren Buffett says, "you pay a high price for a cheery consensus."

Lenny @ visibleinvesting.com

throberts3
Throberts3 - 10 years ago    Report SPAM
I've tried to evaluate what it means when Walmart same store US sales comps are 1-2%, and Target's are around 5%. By itself, this info implies that Target is better. However, after looking at the most recent 10K's for each company, I learned that Walmart is averaging $421 in avg sales/sf ($542 psf at Sam's) and Target is at $295 (these numbers include new stores as well as stores open for more than a year). Having also read Eddie Lampert's explanation in the Sears annual report that an exclusive focus on same store sales comps ignores the incremental investment required to achieve those sales, I realized that since sales revenues psf are already so high at Walmart that it might be quite costly to increase them - not unlike a factory that is already running at full capacity. Presumably, it's easier for TGT to increase sales from $295 psf than it is to raise WMT sales from $421 psf. This implies that the right move is for WMT to increase sales by investing in new stores (US or abroad) than to invest much to improve sales comps. If the return from new store investment is found to be inadequate, the company could also elect to pay dividends or repurchase stock.

This is not to say the WMT doesn't have problems - can't sell fashion, missing higher margin sales, can't reach TGT's higher income customers, etc. Nor am I saying that TGT is a bad investment. But I believe it may be reasonable to conclude that Walmart is not as bad as the market percieves it to be, and that this is a unique opportunity to buy a company that has and will provide good returns (i.e. 22% ROE) over a long period of time.

I would appreciate any comments.
learnfrommistakes
Learnfrommistakes - 10 years ago    Report SPAM
"I've tried to evaluate what it means when Walmart same store US sales comps are 1-2%, and Target's are around 5%. By itself, this info implies that Target is better. However, after looking at the most recent 10K's for each company, I learned that Walmart is averaging $421 in avg sales/sf ($542 psf at Sam's) and Target is at $295 (these numbers include new stores as well as stores open for more than a year). Having also read Eddie Lampert's explanation in the Sears annual report that an exclusive focus on same store sales comps ignores the incremental investment required to achieve those sales, I realized that since sales revenues psf are already so high at Walmart that it might be quite costly to increase them - not unlike a factory that is already running at full capacity. Presumably, it's easier for TGT to increase sales from $295 psf than it is to raise WMT sales from $421 psf. This implies that the right move is for WMT to increase sales by investing in new stores (US or abroad) than to invest much to improve sales comps. If the return from new store investment is found to be inadequate, the company could also elect to pay dividends or repurchase stock"

very helpful explanation, thanks.
sgeranpa
Sgeranpa - 10 years ago    Report SPAM
In the long run I believe wmt will be a far better investment than tgt. There is really nothing tgt can do that wmt can't. But there is one thing wmt has that tgt can't replicate, and that is economies of scale. Wmt can negotiate far better deals with suppliers and furthermore its costs of distribution are far less due to its size. That is why Morningstar assigns wmt a wide moat rating and tgt a narrow moat. Wmt is the low cost provider and tgt can't really match that. As a wmt shareholder I'd rather see them widening their moat by continuing their new store openings even if it means cannibalizing existing store sales. IMO the stock can double in 3 years through both p/e expansion and earnings growth.
kfh227
Kfh227 - 10 years ago    Report SPAM
I was in Wal-Mart several days ago and something struck me ... they are remodeling. Well ... that's a bit to much of a comment. Looks like they are trying to freshen things up. What I am referring to is that they are making VERY LARGE banners that attach to the ceiling to label the various areas at the local Super Wal-Mart. Which makes sense because one's first trip into a Super Wal-Mart can be overwhelming. The signs were probably 40 feet wide and farily vibrant.

The downside is htat hte signs don't match the current styling of Wal-Mart. I think the signs were Green.

sgeranpa,

Don't sit around waiting for WMT share price to double in 3 years. Myabe in 5-7 ... but not 3. It could happen, but not for rational reasons.
visible
Visible - 10 years ago    Report SPAM
A couple things.

Most of the value investors got in at lower prices - that's one of the 3 big reasons its hard to mimic the guru returns

A double in 5 years would be almost 15%/year, plus the dividiend - that's a great return.
JJJJJJJJ
JJJJJJJJ - 10 years ago    Report SPAM
All I know is that Warren Buffett bought Wal-Mart 1.5-2 years years ago at around 46/share and hasn't sold one share, even though the per-share value hasn't increased... also Greenblat has made a big bet on the retailer ... that's really all you need to know.
JMoney
JMoney - 10 years ago    Report SPAM
Wal-Mart already is the next Atria; its reputation as an evil corporation is keeping the stock price artificially low. Most people who knock the business on “moral” grounds don’t need to shop there (and never did) since they have enough money not to. However, the nation’s poor are voting with their wallets, as Wal-Mart’s revenues continue to increase. The high-growth days may not be over (international expansion), but even if they are, buy below 50 and be patient! Why? Buffett and Greenblatt did as JJJJJJJJ correctly pointed out (check this website), and given the choice between Buffett’s pick and anyone else’s, I go with Buffett.
billytickets
Billytickets - 10 years ago    Report SPAM
EXCELLENT article I agree
kfh227
Kfh227 - 9 years ago    Report SPAM
Just wanted to revive this thread as WMT is looking just as attractive as JNJ these days. TGT also looks good, but WMT is what I'm starting at more these days. Just a better company.

Closed at $46.17 today. That's WEB estimated purchase price from almost 2 years ago!

http://www.gurufocus.com/StockBuy.php?action=buy&GuruName=Warren+Buffett&p=2

This is also near the bottom of hte 52 week range:

http://finance.yahoo.com/q?s=WMT

I'm looking at it very intently right now. Just a small dip and I'll be doing some naked puts out to March 2008
billytickets
Billytickets - 9 years ago    Report SPAM
I have to agree that wmt is really getting cheap here for BillyT.Ironically J money called this the next Altria. Altria is up almost 4 times for the lows i bought it at 7 years ago. Glad this thread was revived
Myth465
Myth465 - 9 years ago    Report SPAM
Walmart is a great buy but, I believe the small investor can do better due having more options.
Dregw
Dregw - 9 years ago    Report SPAM
I happen to live near their "new concept" store in Plano, Texas. It is a great store and is as nice or nicer than any Target I've been in. The parking lot is always packed and it is in a neighborhood where the average home is over 5,000 square feet. Not that this makes it a good investment, but they are moving towards catering each store to the neighborhood and customers it serves. This one is for very high end customers and the store is packed with high income customers. Just an FYI since this is their first one in the country. By the way, I own WMT and plan on purchasing it as long as it is under $50/share.
billytickets
Billytickets - 9 years ago    Report SPAM
Wal Mart at these prices are a no brainer their is arumor teh chinese want to invest about 8 billion on the openmarket

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