Have Weak Sales Hurt Wal-Mart's Value?

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.

The question here is, how much of Wal-Mart's first-quarter results should be blamed on recent macro events such as the 2% increase in the Social Security payroll tax rolled out at the beginning of the year? Not to mention there was the delay in income tax refunds; the company warned back in January that its earnings results may be adversely affected.

These two events point to one thing: consumer spending, which always matters to Wal-Mart. While the 2% decline in store traffic is discouraging, investors realize that "this is Wal-Mart." What I mean is, we've been here before and the company has overcome much worse. The fact is people aren't going to suddenly stop shopping for food and household goods. Not many stores can compete with Wal-Mart on pricing and convenience.

For that matter, management said Wal-Mart was able to gain market share in categories like food, consumable and health and wellness products. This is the second consecutive quarter in which Wal-Mart has done so.

Management also expects modest improvements going forward as earnings-per-share guidance for the second-quarter expected to come in the range of $1.22 to $1.27, which represents year-over-year growth of 3% to 7%.

Bottom Line

Macro concerns can weigh heavily on Wal-Mart, which would then impact upon the stock. But given the company's immense size, which serves as protection, the shares are not going to sway that drastically from one quarter to the next. Besides, Wal-Mart doesn't always get the credit it deserves for operating one of the most efficient businesses in the world.

The fact that shares are trading at just 13 times fiscal 2014 EPS estimates, which is almost two points below the industry P/E average, presents not great but decent value. The stock's 16% year-to-date gains notwithstanding, over the course of the next six to 12 months, investors should expect additional gains of 5% to 7%.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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