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Market Update

Tough 1Q Doesn't Threaten Wal-Mart's Moat

The discount retailer's scale advantages keep its operating costs lower than peers' and should help the firm sustain excess returns on invested capital for the foreseeable future.

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 Wal-Mart Stores (WMT) reported first-quarter results that were below our expectations on both the top and bottom lines, as expense deleverage, partially a factor of weak comparable-store sales growth, continued during the period. We intend to update our near-term forecasts to reflect recent results, but we don't expect a material change to our fair value estimate, given that the time value of money will most likely offset lower near-term estimates. 

At current levels, the shares appear slightly undervalued. Given Wal-Mart's stable cash flow generation, we think investors could invest in this low-uncertainty name with only a marginally larger margin of safety, though we note that wide-moat  Costco Wholesale (COST) also trades at attractive levels relative to our fair value estimate.

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