The retailer looks fairly valued as it posts its eighth consecutive quarter of same-store sales growth.
By Erin Lash, CFA | 08-18-16 | 12:52 PM | Email Article

Our $75 per share fair value estimate for wide-moat  Wal-Mart  remains intact after digesting second-quarter results that included 2.8% organic sales growth. In the U.S., comparable-store sales increased 1.6%, reflecting higher traffic (up 1.2%) and increased average ticket (up 0.4%), marking the eighth consecutive quarter of positive same-store sales growth and the seventh consecutive quarter of positive traffic for Wal-Mart U.S. This performance was even more impressive, given it came despite food price deflation, which negatively impacted comps to the tune of 100 basis points. As a result, we maintain our stance that even in a highly competitive environment, the Wal-Mart banner still has power to drive traffic.

Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.

Beyond its home turf, Wal-Mart’s international business chalked up 2.2% underlying sales growth, with the firm posting positive comps in Mexico, Canada, and Brazil. However, the U.K. continues to struggle at the hand of intense price competition--pressure that we don’t expect to abate in the near term. In the aggregate, we forecast Wal-Mart to generate 3%-4% sales growth outside the U.S. over our 10-year explicit forecast.

Due to continued investments in higher wages and e-commerce, adjusted operating income edged down 30 basis points to 4.7%. But despite the near-term hit to profitability, we think that this spending is prudent, particularly given the threats Wal-Mart faces from competitors (namely Amazon) that are also investing aggressively.

Management bumped up its full-year earnings per share guidance to $4.15-$4.35 (from $4.00-$4.30), but our outlook ($4.18) is still within the company’s revised range. Over the longer term, we believe Wal-Mart’s cost edge will enable it to leverage 2% total sales growth to sustain 5% operating margins (versus a 5.8% 10-year historical average) once its investments moderate over the next few years. Shares trade in line with our valuation, though, and we’d suggest investors await a more attractive entry point.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Securities mentioned in this article



Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners