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I am looking for some thoughts on Walmart as it is getting beat up a bit today. My view is that no matter how good or bad the economy is, Walmart will do very well because it sells what people need at the best price. Yield should double every 4-5 years, $16. billion buyback in place, huge cash flows, large moat.

 

Any thoughts?

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I'm not surprised that WMT is not getting much air time.  It's selling slightly north of 14X earnings.  While that's relatively cheap for WalMart, it doesn't mean it's cheap-cheap. 

 

The big question about WMT revolves around future growth.  At a certain point, it can no longer rack up 10% annual sales increases.....so what should we expect going forward?  Perhaps 2% annual SSS growth to reflect inflation, plus maybe another 4% annual sales increase to reflect an increasing store count?  I really don't know.

 

Anyway, in 2006 or 2007, a company like WalMart would have been very attractive at 14X or 15X earnings and the prospect for steady 6% growth.  However, most of us have had a spectacular opportunity to deploy capital into much better vehicles over the past year due to the wonderfully volatile markets of last winter.  We are spoiled from having had so many no-brainer opportunities that WMT simply looks mediocre in comparison.

 

SJ

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Thanks for your reply.

 

In your response you mentioned the most compelling reason to buy Walmart right now without even realizing it:

 

"However, most of us have had a spectacular opportunity to deploy capital into much better vehicles over the past year due to the wonderfully volatile markets of last winter.  We are spoiled from having had so many no-brainer opportunities that WMT simply looks mediocre in comparison."

 

Most successful fund managers will tell you (through reading their commentaries) that you buy best of breed/quality stocks when there is no interest in the stock (when no one is talking about the stock). That is exactly why I am going to start buying Walmart this week and hold it for a very long time. The lowest price target on the street, I believe, is $50/share, and the stock is already trading under that threshold.

 

So much to like in my opinion.

 

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I am trying to think how WMT will grow any faster than the GDP of the US going forward.

 

Expansion into other countries has been met with extensive competition, and effectively stalled.  e.g. Sam's Club, after a huge foray into Canada has withdrawn, completely, by the looks of it. 

 

Growth to this point has been driven by:

1) First mover advantage exploiting the cheap Asian labour force.  This allowed them to have the Lowest Price is the Law. 

2) Rapid expansion -  and expansion into non-US markets.

3) Inability of competition to keep up on the logistics front.

4) Demand for ever more stuff.

 

I would suggest that:

1) This advantage is gone now.  Labour is getting more expensive, internal markets in these countries are growing, taking away Walmarts price advantage and margins. 

 

2) Expansion into markets outside the US is very limited now.  In every country they go into, the competition is entrenched making it harder to get the cheap growth they are accustomed to.

 

3) Homegrown competition has learned logistics.  Also the logistics machine was partly based on their ability to move into new markets rapidly and have very quick deployment of stores and goods.  This strategy has reached its limit in nearly ever new market available.  There is no advantage of putting the huge logisitics machine in place in a market where Sam's club and the grocery expansion have failied.  If fact, it becomes a disadvantage on the cost front.

 

4) I think that consumers are exhausted.  I also thinking a prolonged recession pushes people to buy better quality because it lasts longer.  Walmart is not reknowned in this department.  Now, on this I may be underestimating the conditioning of the American public.

 

Other:

When your business relies on the less well off in society to maintain its moat it had better be a real good moat.  Macdonalds and Coke have such a moat.  I see people going to Mcd for the experience or drinking a Coke for the experience.  I am having a hard time conceiving why Walmart would have a moat at all as a brand.  It's moat rests in having the lowest price which is no longer its advantage.

 

I would suggest that buying stock in Walmart is dead money at best. 

 

At worst it could experience actual drops in earnings and PE compression which could completely crush the stock.  The potential for a 70-80% inflation adjusted loss is very great with this company. 

 

 

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Expansion into other countries has been met with extensive competition, and effectively stalled.  e.g. Sam's Club, after a huge foray into Canada has withdrawn, completely, by the looks of it. 

 

Sam's Club is a small piece of the puzzle in Canada and was only in Southern Ontario.  They are building new WM supercenters in other parts of Canada.

 

Wal-Mart Canada to close Sam's Club stores

Last Updated: Friday, February 27, 2009 | 7:13 AM ET

Wal-Mart Canada will close its Sam's Club stores in southern Ontario next month, affecting 1,200 jobs. The company, which employs 80,000 people across the country, says it plans to focus business operations on its supercentre outlets and discount stores as people become more price conscious in the worsening economy. Sam's Club is a members-only, warehouse-style format, similar to Costco. It's been in operation in Canada for five years.

 

4) I think that consumers are exhausted.  I also thinking a prolonged recession pushes people to buy better quality because it lasts longer.  Walmart is not reknowned in this department. Now, on this I may be underestimating the conditioning of the American public.

 

I am not a cheerleader for Walmart but I have been in a new Supercenter recently. Just about anything that you actually need to buy is a dollar or two cheaper than anywhere else in town. I'm not talking about cheap knock-offs, I'm not talking about the brands I have been used to buying for 20 years here. Oskar brand brooms, altantic bee mops, other household needs like batteries, smoke detectors, socks/underwear, toilet paper, automotive fluids. They are pretty cost competitive on a majority of the products I have seen in there. and the customers seem to know it... the stores here are packed.  However, I can't speak for other areas.

 

cheers,

nodnub

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i think WMT and COST are fantastic inevitable businesses.  I'd love to own both if the price was right.  I'm still trying to figure out what 'right price' really is, but I'm interested in both at today's prices.

 

I think WMT is one of the most misunderstood businesses out there personally.

 

Ben

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I agree.  The stores are packed now... so where is your growth going to come from?

 

At some point there is a growth limit and I think that limit is close.  There is no significant downside baked into the stock price to reflect that.

 

Peter Lynch probably describes it further better than I can in "One up...".  Todays fast grower becomes tomorrows slow growing stalwart.  WMT is well past the fast grower stage now. 

 

If the share price moves nowhere for 10 years that is a loss of 30-40% plus opportunity cost.  If it was 70% cheaper I think it would be good value.  I would like to see them feed some of that cash out to shareholders as well.  For a cash machine it sure is a stingy dividend. 

 

If it only goes to 75 you break even in 10 years.

 

 

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Last time I looked at Walmart, I determined that it was trading at a valuation that was fair but not cheap.  Walmart is a great business, and I'd rather own Walmart for the long run than many other available investments, but it's not trading at enough of a discount for me at this time given the other potential investments available.

 

As people have pointed out, Walmart has pretty much saturated the U.S. market with its retail operations.  So the question is whether they can successfully expand abroad, either through wholly-owned direct ventures, joint ventures, or equity investments in retailers that WMT can help optimize.

 

Walmart is expanding abroad in the BRIC countries, but it's unclear what type of profits they will make from this expansion.  Just recently I heard about Walmart having opened up a store in Amritsar, which is in the state of Punjab (in India).  However, according to an article I read about the Walmart operation in Amritsar, the store is a wholesale rather than retail operation.  It's all about logistics and supplier networks, not the brand.  And they will have quite a bit of competition from the likes of Tesco, Carrefour, and homegrown companies, who were much faster at moving in India than Walmart.  Margins will be razor thin, and if they cannot expand and gain meaningful market share, earnings from India may not be meaningful in terms of increasing intrinsic value.

 

Basically, if you want to figure out what WMT’s growth will be going forward from their retail business, you need to do some serious due diligence into how much success they are having with their big box format abroad and whether they've partnered with the appropriate people (via joint ventures and equity investments).  Success is by no means guaranteed.  They’ve actually had to pull back from some countries after failing.

 

Note, however, that Walmart may have the opportunity to expand into other lines of business in the U.S. such as health care and finance.  Walmart pushing down the costs of consumer credit transactions would be amazing -- hopefully, the government lets them get into this business.  So that's a potential upside that no one has talked about.

 

You may want to consider other specialty retailers that are trying to expand abroad such as HD or LOW.  I haven't looked at these guys, but they may do better abroad because of their more differentiated operations.

 

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"If it was 70% cheaper I think it would be good value.  I would like to see them feed some of that cash out to shareholders as well.  For a cash machine it sure is a stingy dividend"

 

Are you kidding me? At the rate Walmart is increasing its dividend it will double every 6 years I believe. Not many companies have a $15 billion buyback in place as well-- and they are actually buying back quite a bit of shares under that program. The dividends of retail competitors don't even come close to WMT's current dividend yield (COST, TGT, BBY, etc).

 

Walmart has continually become more shareholder friendly, and I expect that to continue.

 

Scott

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Speaking of international expansions - namely china - Walmart is actually somewhat of a premium store in china. It doesnt really cater to the lower rung, but more to the middle class. Most of the stuff that they can pass off cheap in NA comes from china. But they can't pass off cheap things from China to the chinese, it doesnt really work like that...

 

Anyway, now that im here, most of my comments will be able china =p

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Al,

 

Regarding growth Ops, I agree that WMT has exhausted most of their growth engines. The only exception that I have seen is trying to attract the mid-to-higher socio-economic markets. My example is that they opened a supercenter not far from my home here in suburban Dallas. The location is in a large retail area in an upper-middle class area (Walmart, as we all know, has traditionally appealed to the low to middle socioeconomic and rural markets). The store is actually quite nice and does a great business, easily topping a Target supercenter a half mile away (anecdotally, mind you). They have a large deli, fresh bakery and other prepared foods. In the parking lot, one will find multiple Mercedes, Lexus, BMWs, etc, at any given moment. This may be as much due to the recession as anything else, but it looks like they have figured out how to invest a little more in the store as opposed to the more traditional "stack 'em high and let em' fly" Walmarts of the past 30 years. The stigma of those who would "look down their nose" at Walmarts, at least in this instance, has been taken away.

 

Granted in full that this is not a huge sector of the population and that it won't cause WMT to double in the next 5 years, but it is proof that they can take their expertice with buying and logistics and innovate, and this innovation is likely from where any growth above and beyond GDP growth will come.

 

Now, is that enough to make a 14 P/E look good? Since it is not easily projected, I am not compelled, yet, to buy WMT when, as Eric mentioned, JNJ is selling at a lower multiple with a higher yield. But it is worth keeping an eye on.

 

-Crip

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Keep in mind that Walmart only looks good to a US investor, & only over the near/medium term. Even if it grows @ 10%/yr, if the USD also devalues by 10% - to a non-US investor it is at best, a break-even proposition.

 

Most of their goods sold are imported, but with the USD devaluing those goods either have to sell for more/unit - or Walmart gives up margin. A few richer folks 'sluming', may not be enough to offset the effect of a lot more poorer folks simply 'not buying'.

 

The buybacks are a direct recognition that they have more capital invested than they need going forward. In effect they are winding up a part of their business, & using the proceeds to reduce their share count & raise EPS. Nothing wrong in that - but the opposit of a growing business.

 

Its always nice to have a cash cow.

 

SD

 

 

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"If it was 70% cheaper I think it would be good value.  I would like to see them feed some of that cash out to shareholders as well.  For a cash machine it sure is a stingy dividend"

 

Are you kidding me? At the rate Walmart is increasing its dividend it will double every 6 years I believe. Not many companies have a $15 billion buyback in place as well-- and they are actually buying back quite a bit of shares under that program. The dividends of retail competitors don't even come close to WMT's current dividend yield (COST, TGT, BBY, etc).

 

Walmart has continually become more shareholder friendly, and I expect that to continue.

 

Scott

 

 

 

1) Not kidding.  The dividend at 2.1 % is cheap considering the shares have moved nowhere for ten years.  If they were really shareholder friendly they would raise it to the 4% range, if they could. 

 

2) 15 Billion buyback on stock (if fully executed) is only 5% of the high end market price of the stock.  A buyback in place is not a buy back executed, yet.  Unless buybacks take out a meaningfull number of shares IMO they are just posturing.

 

3) Of course they must become more shareholder friendly.  The shares have done nothing for 10 years.

 

Walmart is in a severely competitive business.  It is not an operation that "an idiot could run".  Someday an idiot will be running Walmart and then what.  You will see capital fly out the door on an endless assortment of stupid projects.

 

Its too pricey, and in too competitive a landscape for me to even think about it.  As I said, if the shares were at a PE of 6 to 8 I would probably buy it.   

 

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While I respect your comments, I completely disagree with your stance on Walmart. While Walmart hasn't performed well over the past decade, it is easy to say the same for many stocks given the recent downturn. The past decade of growth in Walmart will be reflected in the shares in the coming few years, in my opinion. I think of this stock as a springed coil. This is why I have a $75 price target on the stock by 2011.

 

Since your standards for ownership of an equity are so stringent, which stocks are you buying?

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Scott, You posted about Walmart.  I have pointed out the pluses and minuses (mostly minuses) of WMT as I see them.  Its not a personal attack!  Many times I have posted here and heeded the criticisms of others, and other times I have ignored it both to my benefit and detriment.   

 

As for me:  I am mostly selling right now: SPY leaps, SBUX leaps, some AXP leaps, some FFH Calls.  Holding my GE Leaps (tripled at this point) and most FFH leaps

 

Have bought lesser amounts of Seaspan, Precision Drilling, Norbord, SFK pulp fund but have maxed these positions now. 

 

Each one of these has the potential to go up by 2-10 times as the recession ebbs. 

 

I am having alot of trouble figuring out the Coiled Spring of Walmart.  It has a market cap of 200 M.  How high can it go, really... 300 M.  That would make it more valuable than MSFT, GE, and XOM.  I am sorry but they are not in the same league as any of those companies.  It is fully valued now.

 

As for Walmart in other businesses I would suggest that Walmart competing in banking or insurance puts them into a business that is out of their core skill set which is logistics. 

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As for Walmart in other businesses I would suggest that Walmart competing in banking or insurance puts them into a business that is out of their core skill set which is logistics.   

 

True, but that does not mean that WMT cannot succeed in these businesses by partnering with other companies or even by starting such businesses in-house.  It depends on whether you think Walmart can get good people to start and run these new businesses.  I think they can.  But finance and health care are going through enormous changes right now, and it makes sense for WMT to wait back and see how things turn out before potentially moving in to try to add value in these sectors.

 

My main point is that Walmart, which I believe is a well-run company, still has the opportunity to leverage their customer base in the U.S. to provide new products and services at a value price.  Certain financial products such as consumer/transactional credit and basic health care services (think walk-in clinics for simple medical problems) could be a great fit for the company, which would boost their bottom line profits apart from expanding their retail presence.

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As for Walmart in other businesses I would suggest that Walmart competing in banking or insurance puts them into a business that is out of their core skill set which is logistics.   

 

 

My main point is that Walmart, which I believe is a well-run company, still has the opportunity to leverage their customer base in the U.S. to provide new products and services at a value price.  Certain financial products such as consumer/transactional credit and basic health care services (think walk-in clinics for simple medical problems) could be a great fit for the company, which would boost their bottom line profits apart from expanding their retail presence.

 

 

So your investment thesis is driven by a bunch of "maybes" and "hopes"? 

 

The responses in this thread that you've gotten to date are stating that:

 

1) there is limited potential for WMT's future domestic growth in traditional retail;

2) WMT has had a varied experience in breaking into foreign markets (some good, some bad); and

3) a PE of 14-15 is too high in the context of (1) and (2).

 

I don't think that anybody will change their view about (3) based on some far-off hope about new lines of business that may or may not be available, and would take 5-10 years to implement.

 

Anyway, overall I don't hear too many people crapping on how WMT is run, its past growth, or its current profitability.  On the contrary, most people have told you that it's a wonderful business.  It just ain't cheap.

 

SJ

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So your investment thesis is driven by a bunch of "maybes" and "hopes"? 

 

Excuse me -- why don't you read my posts before you start claiming that my "investment thesis is driven by a bunch of 'maybes' and 'hopes.'"  When did I say that I would buy Walmart now or that it was cheap?  I specifically said in my first post that I believe it is trading at a fair (or reasonable) price but is not cheap, and that I would not buy WMT given the other opportunities available at the moment. 

 

The responses in this thread that you've gotten to date are stating that:

 

1) there is limited potential for WMT's future domestic growth in traditional retail;

2) WMT has had a varied experience in breaking into foreign markets (some good, some bad); and

3) a PE of 14-15 is too high in the context of (1) and (2).

 

Yeah, I agreed with (1) and (2). 

 

I don't agree with (3) because I believe that whether WMT is a good buy depends on what you're trying to do with your investment portfolio.  If you're very rich (which I am not) and you're looking for a low risk place to preserve your capital and grow it, albeit at a slow rate, it might not be a bad buy even at a P/E of 15.  After all, that's a greater than 6% earnings coupon that I think will grow over time even if that growth comes through buying back undervalued stock. 

 

I don't think that anybody will change their view about (3) based on some far-off hope about new lines of business that may or may not be available, and would take 5-10 years to implement.

 

I'm not trying to change anyone's view about WMT based solely on these potential new lines of business.  I'm simply trying to add value to the discussion by bringing up some potential future developments for the business -- after all, we're trying to look to where the puck is going, aren't we?

 

Even if I were trying to change people's view, people like you clearly have their minds made up and cannot benefit from hearing other points of view.  I disagree with Uccmal, but I respect his opinion and understand the points he has made about WMT.  Very useful posts he's made.

 

The last post you just made was worthless, on the other hand.

 

Anyway, overall I don't hear too many people crapping on how WMT is run, its past growth, or its current profitability.  On the contrary, most people have told you that it's a wonderful business.  It just ain't cheap.

 

 

No shit.

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I don't think Wal-Mart is overly cheap, and if you're a small value investor there are certainly many other better opportunities out there. However, as a more "defensive investor" (in the Ben Graham tradition) I think Wal-Mart has a lot of things going for it:

 

* Trading at 10% pre-tax yield (EBIT/EV) vs. current bond yields

* Great company, well managed

* Low-cost, extremely efficient distribution, almost impossible to replicate

* Future more certain than other bigger companies like GE, MSFT (i.e., when you think what might happen in 20 years, I think there are much higher odds WMT will still be the leader).

* They've screwed up trying to expand internationally in the past (got outside COC, tried to "build outside their moat" as I like to say). But, I think they've realized this and are focusing more on domestic operations.

* Will do well (though not stellar) through booms/busts in the economy

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My problem with Wal-Mart has nothing to do with the numbers.  Since Mr. Walton died they have become obsessed with the bean counters.  When Sam was alive he went out of his way to encourage US manufacturing if possible and for the time treated the employees OK, not great but OK.  Now the employees are almost slaves (again a personal opinion),they buy the cheapest products even changing formulas to get cheaper inventory (check out Corning Ware).

Costco has done very well doing just the opposite.

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So your investment thesis is driven by a bunch of "maybes" and "hopes"? 

 

Excuse me -- why don't you read my posts before you start claiming that my "investment thesis is driven by a bunch of 'maybes' and 'hopes.'"  When did I say that I would buy Walmart now or that it was cheap?  I specifically said in my first post that I believe it is trading at a fair (or reasonable) price but is not cheap, and that I would not buy WMT given the other opportunities available at the moment. 

 

 

I'm not trying to change anyone's view about WMT based solely on these potential new lines of business.  I'm simply trying to add value to the discussion by bringing up some potential future developments for the business -- after all, we're trying to look to where the puck is going, aren't we?

 

Even if I were trying to change people's view, people like you clearly have their minds made up and cannot benefit from hearing other points of view.  I disagree with Uccmal, but I respect his opinion and understand the points he has made about WMT.  Very useful posts he's made.

 

The last post you just made was worthless, on the other hand.

 

 

 

Well, that's a wonderfully breathy and indignant response!  Do you lead a stressful life by any chance? :o

 

After further review, it would appear that I confused you for the OP, which was entirely my error.  :(

 

In any case, I would note that my observation about there being a lack of value in distant and uncertain ventures may be "worthless" in your opinion, but if you read through many investment fora, you will see numerous examples of people basing investments on these sorts of remote and dubious cashflows.  In your own unique, defensive manner, you have pointed out that you would never errantly attribute excessive value to these types of distant prospect, so I guess that it's of no value to you.

 

Inhale, exhale....

 

SJ

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My problem with Wal-Mart has nothing to do with the numbers.  Since Mr. Walton died they have become obsessed with the bean counters.  When Sam was alive he went out of his way to encourage US manufacturing if possible and for the time treated the employees OK, not great but OK.  Now the employees are almost slaves (again a personal opinion),they buy the cheapest products even changing formulas to get cheaper inventory (check out Corning Ware).

Costco has done very well doing just the opposite.

 

This.

 

Granted, I may have a well documented liberal bias, but I detest what Walmart stands for.  I see it as part and parcel of the very issues that brought the economy to its knees last fall.  Walmart sells short term thinking, instant gratification; Walmart sells a lot of crap.  Sure, they offer the best prices on socks and underwear and many things we actually need.  But they also sell more useless junk than any other vendor on the planet.  Junk designed to offer as little value to the consumer as possible, junk designed to be used up and thrown away. 

 

Beyond that, their employment practices are reprehensible and they have an unfair competitive advantage when they move into new communities that leaves existing businesses in tatters if they survive at all.  It's nothing for them to open a new store and operate at a significant loss for as long as it takes to wipe out other retailers.  They've been accused of similar practices with suppliers who must gear up production to meet Walmart's demand, then when the vendors are completely dependent on Walmart's business they put the screws to them and slash what they're willing to pay for inventory.  What's left are once thriving communities that now depend on Walmart as the sole source of employment, only now the few who still have jobs can scarcely afford to shop there.

 

Even if I wasn't averse to owning Walmart for these reasons, I agree with those who suggest it's run its course by complete saturating the American marketplace.  I disagree that it's a well managed business.  It may have appeared to be one for some time, but it's been shitting the bed the whole time and I believe all of North America is paying the price today.

 

There are those who see the glass half full and those who see the glass as half empty.  I'm among the few who just can't figure out why all the damn glasses are twice as big as they need to be. 

 

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Speaking of international expansions - namely china - Walmart is actually somewhat of a premium store in china. It doesnt really cater to the lower rung, but more to the middle class. Most of the stuff that they can pass off cheap in NA comes from china. But they can't pass off cheap things from China to the chinese, it doesnt really work like that...

 

Anyway, now that im here, most of my comments will be able china =p

 

What we have in Walmart in NA is the super high-end of what you would find in current stores in China. A Walmart selling what it sells in North-America to China would sell high-end stuff to them. If you've been there you probably understand what I mean.. it's almost impossible to find a can opener that works there.I work with China every day and they don't understand what quality is yet. But they do understand price tough.

 

BeerBaron

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