During the past decade, analysts have collectively raised and
lowered their rating on
hundreds of times. Perhaps they shouldn't have bothered. The stock
has gone nowhere in 10 years, having been mostly stuck between $45
and $60 for all of that time. But just because the stock hasn't
gone anywhere doesn't mean investors can't make money from it. Some
have profited handsomely by knowing when to repeatedly enter and
exit the stock. It's a simple approach, though it involves a bit of
math, which I'll detail in a moment.
A different kind of growth stock
Walmart has still been a nice growth story during the past decade.
Earnings per share (
rose by at least +10% from through 2003 to 2006, cooled a bit from
that level in the next few years, but rebounded to rise another
+11% in fiscal 2010. Analysts think profits can grow about +10%
this year and next year. Trouble is, Walmart began the past decade
trading at 70 times trailing earnings. So as profits have grown,
ratio has compressed and shares now trade for just 11 times next
year's projected earnings.
Could that P/E ratio expand? Perhaps by a little bit. The retailer
appears to be on the mend
in the grocery aisle and in international markets. And as I
concluded recently, "if the multiple finally starts to move up to
12 or 13, then investors are looking at +20% to +30% upside. After
a decade of moving sideways, it may seem foolhardy to predict a big
run for shares of Walmart at this point. But a combination of
rising sales, improved sourcing, tighter expense control and a
reduced share count make this mega-retailer poised to surprise on
Walmart's real yield
Indeed shares may move up, and you'll need to effectively gauge
when to take profits. You'll find no better gauge than
free cash flow
, which is operating
minus capital expenditures. Since Walmart is now as large and
stable as any company you'll find, look at that free cash flow as a
for the company's income-producing capabilities. This is known as
the free cash flow
. (In this instance, Walmart's yield is not a useful gauge, as the
mega-retailer offers a fairly low payout).
Walmart generated around $8 billion in free cash flow in fiscal
2009, $9.9 billion in fiscal 2010, and should see that metric rise
to around $10.6 billion this
. The entire company is valued at $190 billion, which means that
the free cash flow yield ($10.6 billion/$190 billion) is about
5.6%. That's substantially higher than "A"-rated corporate
rates, which yield 4.3%, according to valubond.com. Walmart is
arguably more stable than most "A"-rated bond issuers and is more
akin to an "AA" or even "AAA"-rated issuer.
Action to Take -->
By this math, relative to corporate debt, Walmart's equity is quite
attractive. The shares would need to trade up to around $65 to be
valued comparably. Investors can feel comfortable owning shares at
current levels, but be prepared to sell if they move into the low
$60s, making for a nice range-bound trade. The shares provide even
more comfort at current levels when you consider that sales are
modestly growing and per share profits are growing at an even
faster pace, thanks to ongoing massive stock buybacks.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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