With shares trading at around a 10% discount to our valuation, investors should keep Wal-Mart on their radar screens.
By Erin Lash, CFA | 11-17-16 | 12:00 PM | Email Article

We don’t expect to materially alter our $76 per share fair value estimate for wide-moat  Wal-Mart  after third-quarter results that included a more than 2% bump in local currency sales but a nearly 60-basis-point erosion in operating margin to 4.3%. Despite the near-term hit to profits, we’ve long thought that the firm’s decision to ramp up investments behind people and technology is essential for the long-term health of the business, and we view this spending as prudent to support its leading competitive edge.

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

Taking into account its year-to-date performance and its outlook for the fourth quarter, management raised the low end of its adjusted earnings per share guidance to $4.20-$4.35 from $4.15-$4.35, but our forecast remains within the firm’s revised range. Longer term, we expect Wal-Mart to realize 2% total sales growth and sustain nearly 5% operating margins (versus a 5.8% 10-year historical average) following a moderation in investments the next few years. Shares trade around a 10% discount to our valuation, and we’d suggest investors interested in the space keep Wal-Mart on their radar screens.

Comparable-store sales in the U.S. increased 1.2%, driven by a combination of higher traffic (up 0.7%) and increased average ticket (up 0.5%), with a two-year stack that included a 2.7% comp increase and 2.4% uptick in traffic. This performance marked the ninth consecutive quarter of positive same store sales growth and the eighth consecutive quarter of positive traffic for Wal-Mart U.S. And these results came even as food cost deflation continued to eat into the firm’s results, negatively affecting comps on its home turf by 150 basis points (north of the 110-basis-point unfavorable impact in the second quarter).

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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