Is There Value in Wal-Mart Ahead of Earnings?

NEW YORK (TheStreet) -- Earnings season has reached the point where investors will get a glimpse of how well retailers have performed over the past three months. And there's no question that Wal-Mart (WMT), despite the constant stream of negative news about the company, enjoys an extremely large part of all the U.S. retail business.

While it's known for its strong discount prices, what many investors don't know is that Wal-Mart operates one of the most efficient businesses in the world. And although the company didn't have (by its own standards) an exceptional May quarter, it was Wal-Mart's efficiency that once again helped deliver solid profits.

On Thursday, the company will report fiscal second-quarter results. And the Street will be looking to see if the management's recent focus on price can continue paying dividends.

I can never talk about Wal-Mart's strength in efficiency without ever stirring up emotion and long-winded political debates. I've been accused of having become a Wal-Mart apologist, but I don't believe that the company, despite all the good that it's done, has ever gotten a fair shake. Wal-Mart gets killed in the press for a host of issues from disputes over low wages and killing off mom-and-pop shops to sourcing products from China.

It seems everyone can operate under the rules of capitalism, except Wal-Mart. I've made this point before and it's worth repeating here:

If you take a look at, say, Amazon ( AMZN), you will see that Amazon has used similar sales tactics. While Wal-Mart's efficiency has benefited consumers who have come to expect the lowest possible prices, Amazon shoppers are able to save on (among other things) shipping and taxes.

For this, Amazon is perceived as angelic and can do no wrong. But somehow, Wal-Mart is evil.

On Thursday, I don't expect that any of this will matter. The Street will be looking for $1.25 in earnings per share, which would represent year-over-year growth of 5.6%. Revenue it expected to be at $118.6 billion, or 3.8% year-over-year growth.

There's no question that investors have begun to feel better about the strength of the U.S. economy. And Wal-Mart's sales have often been viewed as a gauge for such confidence. But the revenue expectations seem a bit aggressive.

Let's not forget that the May quarter produced just 1% year-over-year growth -- reaching just $113.4 billion. What's more, the Commerce Department's most recent retail sales report showed a disappointing increase in July of only 20 basis points, with the overall total coming down more than 5% year over year.

If that weren't bad enough, these results come right after a 40 basis-point sales increase in June, which was much lower than expected.

So, when you put these results together with rising gas prices, it will take a miracle for Wal-Mart to outperform expectations, given that consumers have had less in their wallets to spend this summer. The hope here is that back-to-school shopping, which is also going on at rival stores like Target ( TGT), can be a worthwhile catalyst for Wal-Mart. But I wouldn't hold my breath.

Here again, this is where Wal-Mart's "evil" efficiency methods come into play.

In that sense, even though I don't expect a beat on revenue, I don't believe it will matter all that much - not to the extent that revenue trumps the importance of profits. Given Wal-Mart's massive global reach and its maturity level, as with McDonald's ( MCD), it is Wal-Mart's bottom line that will carry the stock.

To that end, Wal-Mart's size will continue to serve as protection, regardless of what is said in the news and in the press about the company.

The fact that shares are trading at just 13 times fiscal 2014 earnings-per-share estimates, which is almost two points below the industry average, I still believe there is decent value here in this stock. To that end, I'm sticking with my year-end $80 target on the basis of sustained market share gains and free-cash-flow growth.

At the time of publication, the author held 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 co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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