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Have Weak Sales Hurt Wal-Mart's Value?

Stocks in this article: WMT COST TGT MCD

NEW YORK ( TheStreet) -- On April 2, when we last discussed retail giant Wal-Mart (WMT), I made a case for why I thought the stock was undervalued despite the stock (at the time) posting 12% gains.

In that article, while comparing the relative performances of rivals Costco (COST) and Target (TGT), I said:

"For now, from an investment perspective, the stock is still trading at an attractive valuation. When compared to Costco and Target, which are both trading at higher P/E ratios, a case can be made that Wal-Mart is undervalued by at least 10%. With continued operational improvements and a recovering economy, patient investors should expect shares to approach the lower $80s by the second half of the year."

Since that article, the stock has gained as much as 6% when factoring the 52-week high of $79.96 reached on May 15. While I'm not ready to change direction on my bullish sentiment, I was nonetheless disappointed by Wal-Mart's weak first-quarter sales, which prompted shares to fall by as much as 3%.

Consolidated revenue was just 1% higher year over year to $113.4 billion. The company was slightly affected by currency exchange rate, which otherwise would have boosted revenue closer to 2%. It's still not a huge number, but given the massive global reach of this company revenue results needs to be kept in perspective. Besides, once you've reached the maturity level of Wal-Mart, it's the bottom line that carries the stock.

Nevertheless, despite decent growth (relative to expectations), theretail giant saw weak sales in its U.S. stores, with no growth. For that matter, the company's dominant Sam's Club, which rivals large discount outlets like Costco, posted an anemic year-over-year growth of half of 1% (when excluding fuel). However, the weakness in U.S. was partially offset by better results abroad.

International operations posted 2.9% revenue growth, which nearly doubled in constant currency. "Comps," which is another way to say "same-store sales" -- the metric that tracks revenue results of stores that have been opened at least one year, declined in the U.S. by 1.4%. Here again, this could be a macro issue and not necessarily reflective of poor performance by management. Bears might disagree.

However, I'm willing to excuse Wal-Mart here because even strong brands like McDonald's (MCD) posted a 1% decline in U.S. comps. I don't think anyone is ready to say that McDonald's long-term outlook is on the decline. Even with Wal-Mart's 2% decline in store traffic, the company still reported diluted earnings per share of $1.14, up close to 5% year over year.

What this means is that management is doing a great job navigating this rough patch - helped (in part) by an aggressive cost control, which helped stabilize operating margin, while yielding a 1% improvement in operating income.

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