Wal-Mart Still Weak at Home but Strong Abroad in First Quarter
The market is underestimating Wal-Mart's cash-flow-generating power, leaving shares moderately undervalued.
First-quarter sales for Wal-Mart's (WMT) domestic stores continued to be weak. However, they were offset by strong international top-line results, better-than-expected results at the wholesale club business, and chainwide cost controls. The company delivered about 4% top-line growth, helped some by currency movements, and reported $0.98 in earnings per share, which was $0.02 ahead of consensus estimates. Overall, first-quarter results as well as the updated full-year sales and earnings forecasts are within our expectations, so our long-term assumptions and our fair value estimate are intact. Currently trading at about 11 times on a forward price/earnings basis and roughly 6 times on an enterprise value/EBITDA basis, the shares are undervalued, in our view. We think the company is poised to turn around same-store sales at domestic stores and has significant international growth opportunities still ahead.
Comparable sales at U.S. stores came in at negative 1.1%, as consumers at core U.S. stores remain under pressure from rising gas and food costs. This is now the eighth straight quarter of negative same-store sales declines at U.S. Wal-Mart stores. According to management, initiatives that include everyday low prices, broader assortments, and remodeling are gaining traction in the food segment at stores. However, the transformation in the general merchandise categories will not be complete until the second half of the year. In our view, an excessive inflationary environment that we expect in the back half of the year provides Wal-Mart an opportunity to reconnect with U.S. consumers it lost because of past pricing and merchandising missteps, in particular in the general merchandising categories where the company has lost meaningful market share to the dollar stores.
Given the company's size and scale, positive comps and the subsequent expense leverage provide significant earnings power and cash-flow generation that the market is underestimating, in our view. Moreover, smaller urban- and rural-store formats provide potential sales and share drivers in U.S. markets. The company plans to test 15-20 stores before any meaningful rollout is undertaken. Last, we continue to believe Wal-Mart could be one of the more significant international growth stories in retailing today, evidenced by 11.5% sales growth during the quarter. Given Wal-Mart's footholds in several rapidly developing economies, we expect this segment to deliver about 10% annual revenue growth on average.
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