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Commentary

Wal-Mart Shares Look Undervalued

The market price doesn’t fully reflect Wal-Mart’s potential to leverage cost advantages and brand equity while expanding in multiple channels, says Morningstar’s Ken Perkins.

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 Wal-Mart (WMT) reported second-quarter results that exceeded our expectations on the top line, but higher-than-expected health care costs resulted in operating profit coming in slightly below our forecast (operating margin contracted 20 basis points to 5.6%). Management increased its forecast for higher health care costs to $500 million (from $330 million initially) and incremental investments in e-commerce and technology infrastructure, which combined prompted management to reduce its full-year earnings per share guidance range to $4.90-$5.15 (versus $5.10-$5.45 previously).

We intend to update our near-term forecasts to reflect these higher costs, but still believe Wal-Mart commands a cost advantage over most of its rivals and don’t expect a change to our wide moat rating or $80 fair value estimate. Wal-Mart’s shares currently trade at a discount to our fair value, and while the firm faces several challenges, we think the market price doesn’t fully reflect the company’s potential to leverage cost advantages and brand equity while expanding in multiple channels.

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