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Attractive Risk/Reward Opportunity in Wal-Mart

Even if profit at the retail giant merely stabilizes, investors will be rewarded over the long run, writes Morningstar’s Ken Perkins.


We do not expect to make a material change to our $75 fair value estimate for  Wal-Mart (WMT) after reviewing the firm's fiscal 2016 fourth-quarter earnings and fiscal 2017 guidance. The shares initially fell after the firm reported results, in part because of weak sales growth from Sam's Club, international markets, and e-commerce and in part because of fiscal 2017 sales guidance that was below expectations. However, management's 3%-4% sales guidance offered in October remains unchanged after adjusting for currency headwinds and the firm's decision to close some Brazilian and U.S. stores.

While Wal-Mart shares have bounced about 15% off lows, they still trade at a 12% discount to our fair value estimate. With an earnings yield above 6% (3% dividend yield) and the company repurchasing more than 5% of its shares outstanding each year, Wal-Mart's shares are priced to deliver solid long-term returns even if profits merely stabilize. Given that profits could again grow as wage and e-commerce investments moderate over the next one to three years, we believe the risk/reward opportunity in owning Wal-Mart is attractive in today's uncertain macroeconomic and market environment.

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