Wal-Mart's (WMT) prospects are bright, despite the press's recent negativity. A mere ten years ago, Wal-Mart had approximately 4,500 retail locations and just over $200B in sales. Today it boasts over 9,000 stores and nearly $450B in sales. This has all been achieved with consistently rising margins and unmatched revenue stability (figures taken from Valueline). At a paltry 13X earnings, this company is a gem among stocks.
In the business world, Wal-Mart is doing just fine, but in the investment world, it has an image problem. Wal-Mart symbolizes size. Its stores are massive. It is hard to envision the largest store in your neighborhood shopping mall growing fast enough be a boon to your portfolio. The numbers, though, tell a different story.
A 7.5% 10-yr revenue growth rate isn't anything to sneeze at. That's backed by an 11.6% 10-yr EPS growth rate. Adding in the 2% dividend takes the total yield of this stock confidently into the double digits (figures taken from Valueline). It's not going to be the next Dell (DELL) computers, but it does provide a very nice return.
The fact that Wal-Mart is growing more slowly than some other companies obscures a very important fact - Wal-Mart did not shrink at all during the most recent recession. Reward is always measured relative to risk, and the risk here is balmy. Warren Buffett used to say in his annual partnership letters that his defense was better than his offense. Well, Wal-Mart promises the same.
When you consider no loss of revenue in a recession, Wal-Mart trumps a lot of other fast growing companies that saw their revenue contract sharply in the economy's recent tumble. What's more, that same resilience gives the company strength for a challenging economy.
Of course the revenue and profit growth rates cited above are backward looking. Whether or not this behemoth of a company can even maintain those rates has some analysts calling the company's appreciation potential into question. While size can be a negative factor, there are two particularly positive aspects about Wal-Mart's positioning today that are worth mentioning.
First, the company's international sales make up a much larger portion of its total revenue today than they did ten years ago. 26.1% of fiscal 2011 sales were international according to the company's annual report. International sales are currently growing faster than domestic sales, so this figure is set to increase if current trends continue. This means a healthier top line, and potentially faster growth down the road.
And while size can be a detriment, size can be a good thing too. For example, the company can exert a tremendous amount of pressure on its suppliers. The company actually has a negative cash cycle, meaning that it gets money from customers, on average, before it even has to pay the suppliers of the sold goods. Similarly, this size advantage allows it to pay less for its goods than competitors. In Competitive Strategy, Michael Porter of Harvard Business School cites the position of a company relative to its suppliers as one of five fundamental forces governing business success. Here, that force is an extremely bullish factor.
While the future is uncertain, Wal-Mart presents an attractive opportunity for the enterprising investor. Incredible revenue stability combined with steady high growth makes the company unique. There's no get-rich quick scheme here, just a stalwart long-run play on good business sense and customer loyalty.
Disclosure: I am long WMT.
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