If you followed my advice in June of 2011 to buy Wal-Mart (WMT) because of its attractive valuation and solid fundamentals, you can truly see that diligence pays. Driven by Wal-Mart’s savvy management and intelligent capital allocation, the stock has risen over 45% since my article, outpacing the S&P 500 (up 30%).
But the stock is till cheap and I reiterate my recommendation that investors buy WMT.
Profit Growth Continues Unabated
Wal-Mart has grown after NOPAT) by 11% compounded annually since 1998, which mean the company has quadrupled its NOPAT over that time period, an impressive feat.profits (
Investors concerned about this company’s growth are looking at the wrong numbers. Cash profits, not GAAP earnings, drive market values, and Wal-Mart is a cash flow growing machine.
Unrivaled Efficiency and ROICs
More impressive is the company’ ability to sustain an attractive return on invested capital of around 12.4% while also growing that fast. Most business that grow as fast as Wal-Mart see declines in ROIC, at least in the short term, as all the capital allocated for growth requires some time to generate profits. But not Wal-Mart.
The consistency of Wal-Mart’s ROIC is nearly unparalleled. Of the 2,166 companies for which I have going back at least 10 years, only 11 have a lower variance in ROIC, and none of those 11 have earned positive economic earnings over that timeframe.
Even more impressive is the scale of Wal-Mart’s growth in both revenue and NOPAT. This is not some mom-and-pop operation going from small to not-so-small. Wal-Mart is the biggest retailer in the world going from huge to, for lack of a better term, Wal-Mart huge. To maintain profit margins while incurring all the expense of building and opening new stores is a rare feat. And to do so with such scale is an accomplishment investors should note.
Figure 1: Profitable Growth With WMT’s Scale Is Rare
The Stock Is Still Too Cheap
Wal-Mart’s stock has done well since we first opened a position in June 2011, but it is still significantly undervalued. Wal-Mart now has an economic book value of ~$100/share, while its stock price sits at ~$76/share. This yields a price to economic book value ratio of 0.75, which means that the market currently expects Wal-Mart’s profits to permanently decline by 25%. Such low expectations mean WMT offers attractive risk/reward.
As detailed in Danger Zone 5/20/2013: Amazon.com (AMZN), I do not believe that Amazon poses a major threat to WMT. In fact, I think WMT poses a major threat to AMZN. Considering that WMT already has more scale and margins nearly 4x higher than Amazon’s margins, it is fair to say that Wal-Mart has a strong competitive advantage over Amazon as it does over all other firms in the general retail business.
Investors are getting a steal with WMT at $76/share.
Figure 2: WMT Trades At a Big Discount To No-Growth Value
It is not surprising then, that my two top-rated Consumer Staples ETFs, Vanguard Consumer Staples ETF (VDC) and Consumer Staples Select Sector SPDR (XLP) allocate over 7% of their holdings to WMT and are rated 4-star or Attractive funds. VDC and XLP also happen to be two of my three highest-rated sector ETFs overall.
André Rouillard and Sam McBride contributed to this article.
Disclosure: David Trainer owns WMT. David Trainer, Sam McBride and André Rouillard receive no compensation to write about any specific stock, sector or theme.