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Stock Strategist

Headwinds Continue for Undervalued Wal-Mart

Near-term challenges abound, but cost advantage should allow the retail giant to defend its turf.

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 Wal-Mart (WMT) reported fourth-quarter results that were generally in line with the expectations laid out in late January, when the company lowered its fiscal 2014 guidance because of one-time charges and a larger-than-expected headwind from food stamp cuts. Management also provided guidance for fiscal 2015 that was slightly below our expectations, but we don't expect lower near-term assumptions will have a material impact on our $80 fair value estimate. Wal-Mart could face several challenges over the next few quarters, but we think this wide-moat company's cost advantage should allow it to defend its competitive position. The shares currently trade at a modest discount to our fair value estimate, and we think patient investors could benefit from increasing exposure to this low-uncertainty name.

Wal-Mart U.S. comparable-store sales decreased 0.4% in the quarter, while comparable-store sales at Sam's Club decreased 0.1%. We believe these lackluster results reflect challenging macroeconomic conditions, harsh weather, cuts to food stamp benefits, and aggressive price investments. Wal-Mart's scale economies will allow the company to continue investing aggressively in price while sustaining excess returns on capital. However, we are cautious that the volume uplift from these investments will be muted over the near term; reductions to food stamp benefits could counteract Wal-Mart's lower prices and ultimately result in relatively flat food volume.

Ken Perkins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.