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Commentary

Opportunity in Wal-Mart?

With a wide-moat and low uncertainty rating, the retailer offers a decent margin of safety today, says Morningstar's Ken Perkins.

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After reviewing wide-moat  Wal-Mart’s (WMT) second-quarter results and outlook, we may lower our $81 fair value estimate slightly. Wal-Mart’s top-line growth was solid at 3.6%, excluding foreign exchange, but cost pressures weighed on results and management lowered its full-year guidance by around $0.33 cents (at the midpoint) to $4.40-$4.70 from $4.70-$5.05). However, Wal-Mart’s shares still trade at a discount to our fair value estimate and at 15-16 times forward earnings to competitors in the space. Given our low uncertainty rating, we believe Wal-Mart’s shares offer a decent margin of safety.

We believe that Wal-Mart’s shares declined 3% after earnings because investors are struggling to reconcile positive sales growth trends with the level of investment needed to sustain such growth. On the positive side, Wal-Mart U.S.' comparable-store sales increased 1.5% (traffic up 1.3%) and Sam’s Club’s increased 1.3% (traffic up 0.5%). Moreover, Wal-Mart’s Neighborhood market also continued to perform well (comp growth of 7.3%). Wal-Mart’s international division reported 2.8% currency-neutral sales growth, with the firm taking market share in Mexico, China, and Brazil despite challenges in some of these markets. These results suggest that investments are helping drive growth.

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