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Market Still Not Giving Wal-Mart Enough Credit

The retailer is well positioned for the future, and investors with a long time horizon should consider the shares, writes Morningstar’s Ken Perkins.


We do not expect to make a material change to our $75 fair value estimate for wide-moat  Wal-Mart (WMT) after reviewing the firm’s third-quarter results, as management’s outlook for the next 12-18 months is in line with our forecasts. Wal-Mart’s shares currently trade at roughly a 20% discount to our fair value estimate, implying a forward earnings multiple around 14 times our trough earnings forecast in fiscal 2017 (calendar 2016). We think the company's cost-competitive distribution infrastructure and reputation for low prices leave it better positioned to compete in the online and small-format channels than many market participants give it credit for. Investors with a three- to five-year time horizon should consider establishing a position in Wal-Mart’s shares.

Our long-term thesis remains that Wal-Mart can leverage low-single-digit sales growth as investments moderate over the next 12-18 months, provided that the firm can indeed drive sales growth. Wal-Mart’s U.S. same-store sales once again increased (by 1.5%), with traffic up 1.7% during the third quarter. This increase represents the fourth consecutive quarter of positive traffic at Wal-Mart U.S.; if Wal-Mart generates 1% same-store sales growth in the United States during the fourth quarter, two-year stack comps will improve 50 basis points from the third quarter, indicating a positive trend in growth.

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