Wal-Mart Shares — 3 Pros, 3 Cons

by Tom Taulli | June 16, 2011 11:39 am

If the legendary retailer Sam Walton were alive today, he would certainly be stunned by the performance of the company he founded, Wal-Mart (NYSE:WMT[1]).  Over the past 10 years, the annual average return has been a measly 1.7%. 

But as the world’s largest retailer, should Wal-Mart be able to do better?  It definitely has many benefits. It has the scale to extract great terms from vendors and its cash-flow generation is enormous.  The dividend yield is also a decent 2.8%.

Should investors consider buying shares?  Let’s take a look at the pros and cons:

Pros

New ideas.  Wal-Mart is in the early stages of launching a small-store format concept called Wal-Mart Express. 

No doubt, the company has reached a high degree of saturation in large markets.  But with a small-store strategy, Wal-Mart can potentially find new growth opportunities.  Besides, small stores have lower costs and higher returns on capital.

Global expansion.  This is key to Wal-Mart’s growth strategy.  To this end, the company has been aggressive with its acquisitions.   For example, it has purchased a majority stake in Massmart, which is a top retailer in Africa.  The continent represents a big opportunity and it looks like Wal-Mart will now have a strong foothold.

E-commerce.  This market should continue to grow at a hefty rate for the long haul.  To benefit from this trend, Wal-Mart has been investing more in its digital strategy.  Consider that the company has an online system to allow customers to pick up items.  There is also a move to provide for the delivery of groceries via an online system. 

Cons

Traction.  For the past two years, the same-store growth rate in the U.S. has been declining.  It’s a scary statistic.  Unless it is corrected, it will be extremely difficult for Wal-Mart’s stock to get traction again.

Competition.  The discount category has been red hot.  In other words, Wal-Mart now has to contend with many competitors.  These include Family Dollar (NYSE:FDO[2]

), Target (NYSE:TGT[3]) and Costco (Nasdaq:COST[4]).  These companies have been successful in providing a wide assortment of products at fairly low prices. 

There is also competition from e-commerce operators, especially Amazon.com (Nasdaq:AMZN[5]).

Inflation.  Higher gas prices are taking a toll on Wal-Mart.  Essentially, it means that its customers will put off the purchase of discretionary items. 

Verdict

Wal-Mart is taking smart moves to improve its operations.  However, in light of the company’s massive size – which is over $400 billion in revenue – it will take time to make a material impact.

In the meantime, Wal-Mart still faces some tough challenges.  These include competition, a sluggish economy and weak same-store sales growth. 

Even though the valuation is attractive – at 11 times earnings – the cons still outweigh the pros on the stock.

Tom Taulli’s latest book is “All About Short Selling[6]” and he has an upcoming book called “All About Commodities[7].”  You can find him at Twitter account @ttaulli[8].  He does not own a position in any of the stocks named here.

Source URL: https://investorplace.com/2011/06/wal-mart-shares-3-pros-3-cons-2/

---