Despite 12+ years of essentially going nowhere, shares of Wal-Mart Stores, Inc. (WMT) may finally be poised for a break out.
The world’s largest retailer offers solid earnings growth potential and is finally trading at a very reasonable price. Although shares haven’t done much over the last decade, they were trading at a whopping 38x forward earnings back in 2000. Today they’re at just 12x forward earnings.
The company has been generating some momentum over the last several months too, with 3 consecutive months of positive same-store sales growth and 3 consecutive quarters of positive earnings surprises. It is a Zacks #2 Rank (Buy) stock.
Wal-Mart has also been aggressively buying back stock and pays a dividend that yields a solid 2.6%.
Second Quarter Results
Wal-Mart reported better than expected results for its fiscal 2012 second quarter on August 16. Earnings per share came in at $1.09, beating the Zacks Consensus Estimate by a penny. It was a solid 12% increase over the same quarter in 2010.
Total revenue rose 5% year-over-year to $109.366 billion, ahead of the Zacks Consensus Estimate of $108.095 billion. While sales were flat in the U.S. division, the International segment experienced a stellar 16% increase in sales. Sam’s Club reported sales growth of 5%, excluding fuel.
Outlook
Management revised its guidance for 2012 following its second quarter results. The company narrowed and increased its full year EPS guidance to a range of $4.41 to $4.51, reflecting its confidence in the business for the second half of the year.
Following Wal-Mart’s Analyst Day on October 12, the majority of analysts revised their estimates higher for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy) stock.
Several analysts highlighted the fact that Wal-Mart has delivered 3 consecutive months of positive same-store sales growth and seems to be gaining momentum. The company is also expanding its “Neighborhood Markets” concept to expand into urban locations and its “Wal-Mart Express” stores to attract dollar store customers. Wal-Mart is gaining traction in the emerging markets of Brazil and China too.
These factors are expected to drive solid top-line growth over the next several years. This, along with operating leverage and share buybacks, should drive strong EPS growth too. Based on consensus estimates, analysts are projecting 10% EPS growth this year and 9% growth next year.
Returning Value to Shareholders
Wal-Mart generates strong free cash flow and has been using that cash to return value to shareholders through stock buybacks and dividend hikes. In the first six months of its fiscal 2012, Wal-Mart returned a whopping $6.1 billion to shareholders, including over $3.5 billion on 65.4 million shares of its stock.
The company has also been aggressively raising its dividend. Since 2000, Wal-Mart has increased it at an average annual rate of 17.8%:
It currently yields a stellar 2.6%.
Reasonable Valuation
Investors often shun Wal-Mart because its stock has generally been stuck between $45 and $60 per share since 2000. But keep in mind that shares were trading at a frothy 38x forward earnings back in 2000. Today they trade at just 12x forward earnings.
At this level, expect the share price to more closely follow earnings growth over the long-term.
The Bottom Line
With very reasonable valuation and solid growth potential, Wal-Mart may finally be positioned to break out of its multi-year trading range. Investors can enjoy its unmatched stability and 2.6% dividend yield in the meantime.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
